Is ‘buy now, pay later’ entering a new, less controversial, era?

Names are important. Particularly in fintech. 

Two different names for the same thing can confer markedly different reactions from people. 

This is one of the intrinsic reasons for the controversy surrounding firms operating in one of the biggest growth areas of fintech: ‘buy now, pay later’. 

It could be called ‘free liquidity’, you could argue, perhaps a little dewy-eyed.

Or ‘paying interest free for purchase by monthly installements’. Or ‘entering into a credit agreement with a largely unregulated lender you probably just found when going to pay for something online’ could be another. Less catchy but just as accurate

Regardless, names matter. To many people buy now, pay later’ (BNPL) screams irresponsible lending to those who may well quickly get into trouble from overuse. 

It brings out a level of scorn and concern rarely given to established credit card providers charging exorbitant interest rates and penalty fees.

While booming for a number of years in the background, BNPL really came to the fore during the pandemic’s ecommerce boom. 

Three years later and BNPL has grown so rapidly, regulators have finally got their act together here in the UK to address the market. 

Regulation, across the nation

Klarna,Zilch and other ‘buy now, pay later’ firms will have to abide by new rules set out by the UK government.

This will mean providers have to give consumers key information about their loans and issue credit that is - as described by the government - “genuinely” affordable.

Earlier this month, HM Treasury launched a consultation on BNPL ahead of the new rules coming into force. 

Companies and their credit products will soon be regulated by the Financial Conduct Authority. Consumers will have the new right to take complaints to the Financial Ombudsman Service. 

“People should be able to access affordable credit, but with clear protections in place. That is why these proposed regulations are so important,” said Andrew Griffith, economic secretary to the Treasury.

The new regulations will affect up to 10 million borrowers in the UK, the government estimates, from existing unregulated lending.

Matthew Upton, Director of Policy at Citizens Advice, which has conducted research finding a large minority (40 per cent) have entered into further borrowing to pay off BNPL debts, says the charity has been calling on the Government to urgently push on with regulating Buy Now Pay Later for a number of years with this consultation “been a long time coming”.

“Buy Now Pay Later borrowing can be like quicksand - easy to slip into and very difficult to get out of. As living costs continue to spiral, we know some people are using it to simply make ends meet, without being fully informed about what they are signing up to or properly protected,” he said.

“These reforms should give the industry the overhaul it needs. But action is needed quickly, every day without regulation is another day people are left unprotected,” he added.

Craig Wilson, head of private sector at digital transformation firm, Sopra Steria UK, says it is encouraging the government is looking to improve consumer protections in the space, but “equally as important” is educating consumers on how BNPL works. 

“With soaring numbers of people turning to schemes such as Buy Now Pay Later, and the rising cost of living leaving many struggling to afford necessities, we can expect even more consumers to start adopting unsustainable credit schemes as a means of purchase,” he added. 

Alongside its soaring growth rates in users, there is little evidence that consumers understand how schemes work, or that they understand en mass that BNPL products are in fact debt. 

“BNPL platforms, therefore, have a responsibility to educate consumers on the terms and conditions they’re agreeing to, and the potential consequences of using these services. This is where greater collaboration between the public and private sector is needed, in order to devise a regulatory framework that constantly keeps consumers front of mind,” Wilson said.

BNPL 2.0

BNPL is still booming. 

New research published by the Centre for Financial Capability found more than half (51 per cent) of 18–34-year-olds have used ‘Buy Now Pay Later’ services, an increase from 44 per cent last year. 

Perhaps unsurprisingly most BNPL providers are on board with the new rules, at least in their public statements. Given the take-up from customers - despite more hurdles - the market is growing and will likely continue to become more profitable.

“We have always supported proportionate regulation of the BNPL sector. We need a regime that protects consumers but one that strikes a balance and supports innovation, and competition and reflects the lower risk and average purchase size compared to other forms of credit like store cards or credit cards,” said Gary Rohloff, managing director and co-founder of Laybuy.

“From the very start we have always conducted credit checks and we were among the first BNPL to begin sharing data with credit reference agencies too. So we are happy to engage with the Government on the next steps to make sure we get the right regulation.”

Despite there being many who might wish so, BNPL isn’t going away. But things are evolving quickly.

Klarna for example has started to charge late fees in a bid to dampen what it says are ”less favourable outcomes for customers”.

Zopa, fresh from its acquisition of Dividebuy last week, is preparing to add BNPL 2.0 services to its growing customer base.

Apple too is set to launch its BNPL products soon, just over a year after its acquisition of Credit Kudos, and currently testing in a closed beta of staff members.

New rules, regulations and competitors are likely to bring about a better deal for consumers. But perhaps a name change might also need to be on the cards to win around everybody.