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Australia and the UK are pushing for regulation of Buy It Now / Pay Later offers, fearing the product’s popularity could create increased risk for consumers and traditional lenders.
A report from Australian Parliament found that buy now / pay later financing is now present in over 20% of consumer insolvencies, compared to about 3% of credit card debt insolvencies.
BNPL has grown rapidly over the past year as an alternative to credit cards, especially for young consumers looking to finance big purchases during the pandemic. In some markets, such as the United States, BNPL has experienced triple-digit growth for several months in 2020. The market could grow up to 15 times over the next four years, reaching $ 1 trillion in annual spending globally, according to Bank of America.
BNPL has several forms, some using a consumer’s existing banking and credit relationships to split purchases. The payout option – typically a four-month purchase on a new line of credit – is gaining attention in Australia and the UK
The Australian report refers to a ‘halo effect’ which could cause consumers not only to take on more debt, but also to choose BNPL over other financing options due to the ease and speed of obtaining of credit received. The Australian report will likely lead to some form of BNPL business regulations, such as a provision that obliges lenders to ensure that borrowers can repay. There will likely be restrictions on practice in the UK as well.
“There is a place to buy now / pay later, but now is the time to consider it,” said Brian Riley, director of credit counseling at Mercator Advisory Group, who said the static version BNPL was not bank grade. ready. “There are problems starting to appear. I’m not suggesting killing him but giving him some structure.”
BNPL presents credit and reputational risks. In most cases, the credit check doesn’t include modeling repayment capacity, according to Riley.
The relative lack of regulation for BNPL creates risks for other credit instruments. The Australian report quotes Paul Homes of Queensland Legal Aid as saying BNPL-related defaults could be “artificially low” because BNPL is not regulated like credit and does not have hardship provisions allowing consumers to restructure their debt. For this reason, a consumer with multiple lines of credit will likely pay off the BNPL loan first and seek protection from the hardships of other products, creating additional economic pressure.
The search for the UK Financial Conduct Authority led by former interim FCA chairman Christopher Woolard, found BNPL’s revenue had grown by around 400% in the UK, topping $ 3 billion in transaction volume. In addition, more than 10% of consumers using BNPL were in arrears at the end of 2020. Wollard added that BNPL products should be subject to financial regulation as a “matter of urgency”. Woolard also urged regulatory support for more alternative point-of-sale financing and the introduction of traditional lenders.
Sweden has already passed a regulation that requires merchants to present payment options that do not create debt at the point of sale, and California fined BNPL lenders and demanded a license.
“This suggests that there are a lot of loans to people who cannot afford it and that a [client roster] it’s unreliable, ”Riley said.
Afterpay and Affirm have not commented on this story. Klarna issued an emailed statement in response to FCA’s Wollard report: “Klarna is very comfortable operating in a regulated environment and wholeheartedly supports regulating the industry buy now pay later in the UK. We agree that regulation has not kept pace with new products and changes in consumer behavior and it is now essential that regulation is modern, proportionate and fit for purpose, reflecting both the digital nature of transactions and changing consumer preferences. “
Beyond regulation, the BNPL model itself could come under financial pressure as the number of companies grows. BNPL businesses do not charge interest and earn money from merchants who pay 3-7% transaction fees in return for larger purchase income. But as BNPL’s market grows, the only way BNPL companies can compete will be to lower those fees, according to Orlando Zayas, CEO of Katapult, a New York-based leasing service.
“Lenders rely on these rates and if you give the retailer a better price, you get less to win the deal,” Zayas said.
Katapult offers point-of-sale financing for consumers, often in partnership with BNPL lenders to serve consumers that the BNPL lender refuses. Katapult offers a lease, usually 12 months at twice the sticker price for durable goods like furniture and appliances. The company uses an older funding model that is regulated by the state.
“Since the consumer can return the item and pay off the debt, that appeals to regulators,” Zayas said. “The consumer knows what he is getting into.
BNPL companies will have to counter rate challenges by coming up with other ways to generate money, such as encouraging repeat purchases and producing data or other information of value to traders, Zayas said. “Those who do more than just split payments will be the ones who succeed. “
