Tighter regulation of the buy now, pay later credit industry is on the way, though the government has concluded there is “relatively limited evidence” of widespread consumer harm.
The comment, in a new document from the Treasury, could indicate that legislation will be less tough than some have called for, and may explain why leading buy now, pay later (BNPL) players, such as Klarna, Laybuy and Clearpay, were quick to welcome the long-awaited consultation on how the multibillion-pound industry should be policed.
The new form of credit is especially popular among shoppers under 30 and those with tight finances, who have welcomed the ability to delay payment, and it has taken off during the pandemic.
It allows customers to stagger payments for products such as clothes, footwear, beauty items and furniture with no interest or charges unless they fail to pay back on time, at which point some firms impose late fees. While for some it is the future of millennial finance, for others it could be the next Wonga-style scandal.
The largest of the providers, Klarna is best known for hiring celebrities such as Snoop Dog and Madonna to advertise its services. The Swedish firm became one of the world’s most valuable fintech companies, second only to Stripe, after it was valued at nearly $46bn (£33bn) earlier this year.
The New Zealand-based firm was launched in 2017 but has grown rapidly across the UK and Australia. Purchases are usually spread across six weekly instalments, and this can also apply to items bought in store at partner retailers. Laybuy runs hard credit checks on customers and says it rejects a quarter of all the people who apply.
This Australian company launched in 2014, and entered the UK two years ago. Known as Afterpay in some countries, it allows customers to pay in four instalments two weeks apart. Clearpay currently only operates online but is hoping to launch in bricks-and-mortar stores by early 2022. It was acquired by San Francisco-based Square in August in a $49bn all-stock deal.
The American payments giant allows UK shoppers to split their payments into three monthly instalments at the checkout. It announced in August that it was scrapping late fees for missed payments on all BNPL products globally, which suggests that shoppers had been put off by providers who charged.
In the UK, the use of BNPL nearly quadrupled in 2020, to £2.7bn of transactions, official data shows, despite concern that it encourages shoppers to buy more than they can afford and to rack up sizeable debts. Because much of the market is unregulated, some people are able to take out credit they otherwise would not be able to obtain.
Citizens Advice said BNPL borrowing “can be like quicksand – easy to slip into and very difficult to get out of”.
In February, the government announced that BNPL would be regulated by the Financial Conduct Authority (FCA), ruling there was “a significant risk” of harm to consumers. This came after a review led by Christopher Woolard, a partner at EY. The Treasury has now launched its consultation setting out options for how regulation should happen.
In response to campaigner and politicians’ concerns, the document states that “while the government agrees with the Woolard review about these potential sources of consumer detriment, there is relatively limited evidence of widespread consumer detriment materialising at this stage”.
BNPL should be subject to regulation that is “proportionate” but “not so burdensome that it inhibits the product being offered, or reduces consumer choice”, it says.
Treasury proposals include introducing rules governing how BNPL firms treat customers in financial difficulty. Also, proportionate regulation should include the ability for consumers unhappy about the way a BNPL firm has treated them to complain to the Financial Ombudsman Service.
It could be late 2022 or 2023 before regulation takes effect. The Treasury consultation, which runs until 6 January, will be followed by an FCA consultation.