Thomas Slide
Thomas Slide researches and writes Mintel's UK financial services reports.

Buy Now Pay Later (BNPL) has exploded in popularity in recent years because it offers a simple, streamlined way for consumers to pay. It has become particularly popular among young people and online clothing shoppers because it fits well with the way online shopping works by enabling customers to ‘try before they buy’. However, this growth has not been without controversy and many consumers may be surprised to learn that these products are currently exempt from regulation leaving them with nowhere to turn in the event of problems with the lender.

On 2 February 2021, The Woolard Review recommended that BNPL firms lose their exemption from regulation (currently used by BNPL firms such as Klarna, ClearPay and AfterPay). This will mean greater protections for consumers without having a detrimental impact on the sector.

New rules will enable a more holistic view of affordability

Some BNPL companies have made it clear that they don’t carry out hard credit checks on borrowers, nor do they report missed payments to credit reference agencies. This has been put forward as a benefit to consumers as their credit rating won’t be harmed and is something that is likely to appeal to young people, as over four in ten 25-34 year olds say fear of being turned down has put them off applying for new credit products. 

However, The Woolard Report identified that this lack of transparency has an impact on the wider market since borrowers are unlikely to use a single lending facility. Instead, borrowers could be using multiple BNPL facilities without any evidence on their credit history. As a result other lenders are unable to take into account BNPL liabilities when assessing affordability for other products making it more difficult to make an accurate financial assessment.

Regulatory changes could lead to smaller retailers opting out

Retailers have embraced BNPL because it offers a way to reduce barriers to purchase. However, the recommendations of The Woolard Report are likely to have an impact on how retailers offer BNPL options. The Report cites the example of Sweden which recently enacted a law that ensured that BNPL options can’t be offered as the ‘first choice’ at checkout and this may be something the Financial Conduct Authority (FCA) chooses to adopt.

By removing the regulatory exemption for BNPL, retailers offering the service will be required to become authorised for credit broking. Most large retailers offering credit services will already have this authorisation, but smaller ones are less likely to and some may decide that it isn’t worth the additional hassle and risk.

COVID-19 has highlighted the fragility of finances

With shops closed and consumers stuck at home, online shopping and BNPL schemes have exploded in popularity. Yet at the same time, consumers have become much more cautious about their level of debt, as over half of borrowers say the uncertainty around COVID-19 has made them more wary about borrowing money.

This increasing level of discomfort with debt has been most pronounced among older Millennials, as this group has the largest level of outstanding unsecured debt and is trying to balance this with increased financial responsibilities.

Credit relies on consumers borrowing today on the expectation that they will have the money to repay in the future. The COVID-19 pandemic has shown just how unpredictable future financial predictions can be and this will undermine confidence in debt. This has a more significant impact on longer-term lending with the majority of consumers saying they are concerned about committing to a long-term loan, but it reflects a wider concern about borrowing in such an uncertain period.

Consumers struggle to understand the role of regulation

The largest of the BNPL lenders, Klarna, has been outspoken in its desire to be regulated including running an advertising campaign aimed at dispelling the ‘myth’ that it hates regulation. Once the industry is regulated it should provide consumers and retailers alike with greater confidence around the service and support they will receive.

Klarna advertises its support for regulation, January 2021

Source: Klarna

Regulation will give consumers greater protections as well as recourse to the financial ombudsman should they feel poorly treated. However, Mintel research shows that there is a lack of understanding about the role the regulator plays, especially among young people.

The targeting of young people by BNPL providers is one reason the sector has attracted so much attention. The lack of financial literacy and experience among younger age groups makes them particularly susceptible to inadvertently getting into financial difficulty. The regulator needs to ensure that young people understand the role it plays and the limits of regulation in protecting them from harm.

What we think

The recommendations put forward by The Woolard Review require changes to legislation, which will take time to enact. The changes will add greater protections for consumers, but are unlikely to hamper the success of the sector, since it offers genuine benefits to consumers who use it responsibly. The changes may lead some smaller retailers to stop offering a Buy Now, Pay Later option because of the increased regulatory hoops they need to jump through. However, this is unlikely to affect larger retailers that make up the vast bulk of BNPL transactions.