CREDIT MANAGEMENT JULY and August 2022

OPINION
Innovative thoughts
Buy Now, Pay Later might be the posterchild
for innovation in retail finance.
AUTHOR – Phillip Dransfield
BUY Now Pay Later (BNPL)
sits in a class of agreements
between parties that is quite
vast such as invoicing and
gym memberships. As such
it is largely unregulated
and has been deliberately exempt from
consumer credit laws and regulations. The
decision to exempt it, some 50 years ago,
was sensible at the time as the majority
of these types of arrangement posed little
risk. But unlike most of those traditional
arrangements, BNPL is plain and simple,
lending. It may appear to only separate the
timing of purchasing goods or services
from repayment, but it is a contractual
agreement to make repayments, and it can
lead to interest, and fees being charged.
BNPL has the potential to overcommit
the customer, however, and cause harm
if not conducted well. Being unregulated
seems a little at odds with what most
people might expect today, against
a backdrop of increased consumer
protections that focus on reducing
detriment and harm from lending. Looking
at how BNPL has evolved over these last
few years, it feels regulation and coverage
by law is necessary and timely.
But change is afoot. The industry is
bracing itself, even pre-empting what
might happen with BNPL, in order to
get in front of it. The Financial Conduct
Authority (FCA) led a detailed review
of practices in unsecured credit – the
Woolard Review. This review identified
BNPL as being different from other forms
of arrangements, exempt from consumer
credit laws and regulated activity, and
as presenting a high risk of consumer
detriment. Key areas of concern are around
how it is used, promoted, understood, and
whether good practices are in place to
manage the risks and harm to customers.
The FCA recommended it be brought
within its perimeter of conduct rules, and
the Treasury is consulting on making
statutory changes that will remove current
exemptions.
Providers are pretty savvy though. It
seems clear where this will likely end up
– not too dissimilar from other forms of
lending. Many providers are revising terms,
providing new options for payment at the
point of sale and creating more prominent
messaging and options. Their internal
practices are also sharpening up. Providers
are strengthening their credit risk controls
– adopting good practices in line with more
traditional lending products (and providers)
in assessing customer indebtedness and
ability to afford repayments, as well as
better overall management of their credit
risks."
However, it is important to note
the requirements are not certain. The
questions, as the Treasury put it, are – what
is to be included within the scope (that is,
what is no longer to be exempt) and what
controls need to be in place to manage this.
Their conundrum, remembering that BNPL
looks and feels a lot like other types of
arrangements, is - cast the statutory net too
wide and they risk including arrangements
that do not require such attention and may
have unintentional ramifications on a wide
range of practices; cast it too narrowly,
and it is easy for providers to avoid any
requirements by slightly tweaking their
products and practices.
It is also clear that unregulated BNPL
is becoming significant. Short-term
interest free credit used to purchase
more substantial items (as labelled by
the Treasury and FCA) is not what the
law makers and regulators are concerned
with – it is not what is growing rapidly
or causing detriment to consumers. The
focus of their attention is what they call
unregulated BNPL agreements, which
typically target lower value items, often
non-essential and fast consumable items
like clothing. This is big and growing
with estimates of over £5b last year, and
projections into the tens of billions by some
analysts.
There is potential for BNPL to become
much bigger that it is currently. If the
wider market foray into BNPL continues,
it will likely cannibalise existing lending,
particularly of credit cards, but it may
also increase spend levels overall. Should
BNPL purchases shift upward in value,
this will see total exposures grow quickly.
Individual online retail shopping amounts
for BNPL are relatively low. But aggregating
spend over multiple purchases for a
customer mounts up. If purchases shift to
more substantive goods – the territory of
short-term interest free items mentioned
previously - it will account for a sizeable
chunk of the quarter trillion-pound
unsecured market. Having the largest
BNPL providers sit outside the regulatory
perimeter, or inconsistent practices
between lenders undermines the whole
unsecured market.
In terms of future outlook, analysis by
Redburn suggests BNPL providers that
only offer this product are unlikely to be
sustainable in the long run. Whilst they
look attractive today, they will soon be
outgunned by incumbent lenders. Some of
the largest and most capable companies
are looking at this. Only very recently
Apple launched its foray into BNPL.
Incumbent banks have keenly watched
the development of this market and are
readying to offer the best elements of this
to their customers.
It is not an easy move though. BNPL is
different to traditional lending and the
service element and way providers interact
with and manage their customers and the
business model, need careful consideration
to ensure these subtleties are understood.
Of the current providers, those able to
deepen their offerings and relationships
with a broader suite of products and
services will see sustainable value,
leveraging BNPL as an effective acquisition
generator for new business.
BNPL may be a positive for greater
financial inclusion, but it also points to a
possible vulnerable customer group who
are less aware, less financially astute,
less resilient, and so more susceptible
to harmful practices. Providers should
therefore aim to build on that foundation
with a very clear long-term perspective. A
view that covers decades, not just the next
few years. This is the only way that BNPL
can become the backbone of how people
spend on low to moderate purchases when
requiring credit.
Phillip Dransfield is a Partner at credit risk
analytics firm, 4most
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