UK Treasury: BNPL’s Growth May Give Rise to ‘Consumer Detriment’

In the United Kingdom, buy now, pay later (BNPL) is in the regulatory crosshairs.

To that end, a new call for a consultation/report on buy now, pay later (BNPL) by HM Treasury (the government’s economic and finance ministry) aims to establish frameworks to monitor and introduce new policies in response to BNPL’s explosive growth in the U.K. In the report, the regulator noted that along with the rise of BNPL, “there has been a rise in concerns about whether BNPL is giving rise to consumer detriment.”

The sector is largely unregulated at present, and the report noted that a “balance” must be created between protecting consumers and making new financial innovations available to them.

The Treasury’s report and call for consultation come after the Financial Conduct Authority (FCA) said in February that there were areas of BNPL that were of concern, and that there should be more clarity and “debt advice” for those who need it.

Read next: Buy Now, Pay Later Firms Face UK FCA Crackdown

In general, interest-free credit can be extended so long as it meets the following criteria: The agreement is a borrower-lender-supplier agreement for fixed-sum credit; the number of payments to be made by the borrower does not exceed 12; and those payments are required to be made within a period of 12 months or less.

The paper noted that the value of transactions using BNPL from the main providers more than tripled in 2020. That means 11% of consumers, equating to about five million individuals, said they had used a BNPL offering during the pandemic. The total value of the transactions during 2020, as tallied by the FCA, stood at 2.7 billion pounds.

Greater Risk of ‘Consumer Detriment’

“Based on the current evidence, the government’s view is that the nature of BNPL agreements is likely to present a greater risk of consumer detriment than other agreements” that feature delayed/deferred payments, the report said. There can be misunderstandings about BNPL due to how information is conveyed to consumers. Explanations of key features are frequently lacking, it stated.

In many cases, providers do not check or test creditworthiness, and there remains the potential to “create high levels of indebtedness.”

As the report noted, “creditworthiness assessments help ensure that consumers don’t take on debts that they cannot reasonably repay, and are a key feature of responsible lending practices. For that reason, the government would anticipate that a proportionate regulation of BNPL would include the application of the FCA’s current rules on creditworthiness to BNPL agreements.”

There is at least some evidence that firms operating in the U.K. are being preemptive and proactive about anticipated regulation of the BNPL sector.

As noted this week, the FinTech Klarna is “modifying” its services in the U.K. ahead of new regulations expected to be handed down by regulators. Klarna will now clearly spell out that BNPL is a credit offering that has penalties for missed payments.

Klarna also indicated that it would take a stricter stance with credit checks, and would enable people to share wage and income data from their bank accounts to prove they can make the repayments.

Read also: Klarna Makes Preemptive Move, Overhauls BNPL Program