The buy now, pay later (BNPL) market in the UK has been on a tear. Use of BNPL by consumers is growing, whether it’s to pay for clothing, takeaways, or bigger ticket items, such as furniture and electronics.
Despite this apparent demand, the BNPL sector remains a divisive one. The lending industry is split between those who view its growth as symptomatic of the cost-of-living crisis. They voice concerns that consumers are unaware of the fact that they are getting into debt and of the impact that BNPL can have on an individual’s credit score.
On the other side of the debate are those who regard BNPL as the solution to the growing need for flexible payment options among UK consumers and assert that repayment options and credit agreements are explicitly signposted at checkout.
Whichever side of the BNPL debate you fall on, the sector faces one certainty: it will become regulated. Quite how and what shape this regulation will take in the UK is yet to be defined, however.
Growth spurt
In January this year, credit reference agency Equifax reported that 34% of UK shoppers have now used BNPL services, up from 26% in November 2021.
The Equifax BNPL Barometer, which analyses data from more than 23,000 people who hold current accounts, and 2,000 consumer interviews, suggests that 4.1 million people chose to use the payment method for the first time in 2022.
Equifax’s research also indicates that while young people do tend to use BNPL more than any other demographic, wealthier households are also becoming regular users.
It reported that, outside of the festive period, 55% of 18 to 34-year-olds have used BNPL, while people in higher income households earning between £60,000 and £90,000 per year are now far more likely to have used it than in the past.
Jimmy Fong, chief commercial officer at SEON, which provides fraud detection and prevention solutions, says: “We’ve seen significant growth in BNPL usage across all age groups in the UK in recent years.
“Research from the Centre for Financial Capability found 54% of 18 to 24-year-olds expect to use BNPL in the next 12 months, which is up from 48% the year previous. Therefore, despite some controversy, BNPL is still clearly a fast-growing payment method.”
The UK’s BNPL market shows no signs of slowing, either.
Iana Vidal, director of public policy and regulatory affairs at Clearpay, says: “The UK BNPL market has seen tremendous growth in the last two years, as well as significant consolidation.
Clearpay’s Iana Vidal
“Recent figures by Worldpay have predicted that BNPL will make up 10% of all UK ecommerce spend by 2024, and this forecast is fast becoming a reality – in January this year, BNPL accounted for nearly £1 of every £8 spent online.”
She adds: “Part of this growth is due to consumers preferring to use BNPL, which is interest free, instead of credit cards that come with the risk of revolving debt.
“From a retailer perspective, they are turning to flexible payment options to offer more choice to customers at checkout. Retailers are increasingly recognising the value of partnering with a BNPL provider – that it is a cost-effective way to reach new audiences, at a time when retailers are cutting down on marketing costs.”
Cause for concern or growing pains?
What has rung alarm bells, for some, is the use of BNPL to pay for everyday expenses.
The Equifax BNPL Barometer revealed that 13% of consumers have now used BNPL to pay for a meal or takeaway, and 12% have used it to spread the cost of everyday consumables, such as groceries or toiletries.
In a statement at the time of publication, Jayadeep Nair, chief product and marketing officer at Equifax UK, said: “There’s little in our research to suggest that BNPL does more harm than good for UK consumers, but with more than four million people using it for the first time this year, it’s important that new users are aware of the risks of mismanaging their repayments.”
“BNPL is a solution that offers much greater flexibility, and that’s attractive when making purchases,” adds Fong.
“However, it’s also obvious that people have started to rely on this short-term credit solution more in recent times, as they look for ways to deal with the ongoing cost-of-living crisis in the UK.”
Neil Kadagathur, co-founder and chief executive officer of Creditspring, a credit subscription service regulated by the Financial Conduct Authority (FCA), refers to the growth of BNPL as “a brewing storm”.
Creditspring’s own research has found that 29% of people use BNPL at least once a month, with 9% unable to repay the money they owe – rising to 16% among 18 to 34-year-olds.
In February this year, Creditspring submitted a Freedom of Information Act request to the UK’s Financial Ombudsman Service (FOS), despite the fact it is not yet responsible for handling complaints about BNPL.
The request revealed that 220 complaints were made against BNPL firms last year to FOS, up from 162 in 2020, equating to a 36% increase.
“We want to shine a light on buy now, pay later. We know that regulation is going to come, but we also know that regulation takes time,” Kadagathur says.
Creditspring CEO Neil Kadagathur
“The reason we did that FOI was twofold: it was to highlight the problem and also, perhaps, to kick lenders into gear, because it’s up to the lenders, first, to step up and serve customers better.”
He adds: “We weren’t surprised to see the growing numbers of complaints. I would expect the number to keep growing and that’s a function of the expansion of the total BNPL market – a function of more players entering the space.”
Open Banking and BNPL
Increasingly, Open Banking data is being used to enable BNPL providers and the lending sector more generally, to make more accurate lending and credit decisioning.
Clearpay’s Vidal says that the debate around BNPL regulation has highlighted the challenges of accessing “accurate and useful” credit data to support lending decisions.
She believes that Open Banking can “play a crucial role in solving some of these problems”.
“Clearpay has previously raised concerns about how the current credit referencing system is not set up for BNPL. Firstly, the average order value for Clearpay customers is £65,” Vidal says.
“Combine this with the volume of BNPL transactions and it is clear that there is a lack of capacity for credit reference agencies (CRAs) to make effective assessments in real time. In addition, checking for credit repeatedly can have a negative impact on customers’ credit scores and their ability to access credit.”
She adds: “Open Banking is part of the answer to this, and now that CRAs are beginning to evolve their systems to manage credit checking and reporting for BNPL transactions, we will work with them to ensure that these deliver good outcomes for our customers.”
Fong agrees, pointing out that if Open Banking data was leveraged during BNPL assessments, then decisions would probably be able to be made instantly, and more accurately.
“That’s an exciting thought, but it will require buy-in from the big providers to really get off the ground,” he adds.
Regulation, regulation, regulation
Back in February 2021, the UK government announced its intention to bring currently exempt BNPL products into regulation “in a proportionate way”.
In October the same year, HM Treasury consulted on policy options to deliver regulation, followed by a consultation response in June 2022.
Under plans set out in June last year, the government confirmed that lenders will be required to carry out affordability checks, while borrowers will be able to take a complaint to FOS.
SEON’s Fong acknowledges that regulation “is a very fine line that needs to be walked”.
“Right now, we’re probably seeing BNPL being offered in too many areas, which is becoming harmful. That’s why I think the UK government’s plan to require BNPL providers to check if customers can afford to take out loans is a positive first step,” he notes.
An eight-week consultation on proposed draft legislation that will see BNPL regulated by the FCA is due to close on 11 April.
“BNPL currently finds itself in the crosshairs of both the government and the Financial Conduct Authority, so I don’t think it will be long before it’s regulated in the UK,” Fong adds.
“It’s an issue that needs addressing, but it’s essential that regulations aren’t rushed through just to please critics, as that would benefit nobody.”
Vidal says: “The government has expressed an intention to apply proportionate regulation to the sector that balances consumer protection with innovation and choice.
“We support this approach and have welcomed many of the proposed measures, such as allowing BNPL consumers access to the Financial Ombudsman Service and providing them with cover under Section 75.”
However, she believes that plans to require BNPL providers to send notices of sums in arrears (NOSIAs) to customers if they miss two or more payments are “outdated”, given that these were originally designed for individuals taking out longer-term loans and credit agreements.
“Our existing system already alerts consumers in real-time when payments are due, and automatically suspends an account if a single payment is missed,” says Vidal.
“These are practical solutions that we have used since our launch and we know they work effectively and protect our customers in the best possible way.”
Balancing consumer protection with innovation
The challenge, as many in the industry see it, is regulating BNPL in a way that ensures the sector can remain competitive, while protecting consumers.
Creditspring’s Kadagathur says: “Let’s start treating BNPL like credit, regulating it like credit.”
He adds: “In the regulated credit space, I wouldn’t say there’s a lack of competition and I wouldn’t say there’s a dearth of consumers who aren’t getting served.”
He asserts that regulation of consumer credit in the UK has worked, adding that, “the FCA has done a really good job over the past 10 years, regulating the credit space”.
So, what should regulation of BNPL look like?
Vidal says: “The right regulation that encapsulates all BNPL offerings – whether offered by a BNPL specialist or a retailer’s in-house product – will set a standard that will help safeguard all consumers, while facilitating innovations in consumer credit.”
