How to protect consumers without regulating it away

Calls for regulation of the booming “buy now, pay later” (“BNPL”) industry haven’t stopped big brands like Apple and Amazon from offering consumers an interest-free, no-fee way to distribute payments for purchases. Apple cited the “financial health of users” when it announced the launch of this new feature earlier this month, but research shows those who are financially vulnerable need more protection. It is possible to regulate this sector to protect consumers without completely restricting access. For example, by learning from previous efforts to regulate the payday lending sector, the industry and its regulators could take action to prevent abuse.

Usage of BNPL payment platforms has nearly quadrupled in 2020, with transaction values ​​hitting £2.7bn ($3.31bn). In 2021, the UK BNPL transaction value grew by up to 70 percent to £6.4 billion ($7.83 billion), or 5 percent of the total e-commerce market. This form of credit makes it possible to pay for online purchases in installments without a credit check. It tends to attract younger borrowers, with a quarter of users aged between 18 and 24 and half between 25 and 36, according to data providers share with Britain’s Financial Conduct Authority (“FCA”).

It has also encouraged some buyers to spend more than they can afford. According to Citizens Advice, two in five BNPL users are having repayment difficulties and one in four who have missed a payment have been contacted by collection agencies. And while BNPL was designed as a convenient way to buy expensive items like sofas and TVs, the rising cost of living means people are now using it to pay for essentials like groceries and toiletries. Research has also found that users unable to repay their BNPL sometimes use credit cards with typical interest rates of 20 percent to delay repaying their debt.

An increase in congested users not only harms consumers, but could also harm businesses. Retailers are increasingly relying on BNPL to increase sales by allowing people to spread the cost of goods across a series of payments. You pay the supplier a fee for the goods you buy, and BNPL’s business model relies on repeated use by consumers. Retailers have used this to navigate recent challenges such as Brexit and COVID-19. Up to 92 percent of retailers surveyed last year had integrated their first BNPL solution since early 2020. But the rising cost of living crisis has changed the profitability of this form of credit for everyone involved.

Lessons on regulating BNPL

As a result, regulation seems increasingly likely and necessary to offer consumers greater protection from financial harm. The FCA has already pushed through new contractual changes to the terms and conditions to protect consumers using Klarna, Clearpay, Laybuy and Openpay. These new measures include protecting consumers who cancel their goods through BNPL from being charged a late payment fee.

There is currently hope that other providers will follow suit. This regulation needs to be enforced across the sector in a way that protects consumers without preventing access to this form of finance. The regulation of payday loans in 2015 offers valuable lessons for BNPL. My research into borrower experiences shows that while “costly, short-term” credit regulation protected users from getting too much debt, it also prevented many people from even getting access to that credit. Ultimately, this regulation limited consumer choice by forcing several high-profile lenders into administration. Their business models stopped working due to tighter lending rules and caps on borrowing costs, coupled with an influx of pre-regulated claims for compensation.

protect consumers

A consumer-protecting financial regulation must support those on the lowest incomes who are bearing the heaviest burden in the cost-of-living crisis. In general, an increase in benefits in line with inflation would make sense. Loans aren’t always the answer, but affordable community finance providers like credit unions and community development finance institutions should also be encouraged. For BNPL regulation in particular, regulators can and should draft rules that ensure consumers are protected while still being able to continue using this increasingly popular form of finance. According to my research, the following measures would help:

– Clarification that BNPL is a form of credit and the implications of using it to enable consumers to make informed choices;

– Ensure that providers adequately and appropriately assess whether consumers can afford to pay back loans alongside their other financial obligations in order to reduce overall indebtedness. This would rely on access to real-time data to prevent multiple credits from multiple providers; and

– Increasing the protection of consumer goods compared to other forms of credit such as credit cards, which offer a refund in case of lost or damaged goods.

The BNPL model is unlikely to go away any time soon. Instead, BNPL companies are already beginning to adapt to a more regulated future by changing their business models to some extent. For example, Klarna’s moves to report its data to credit rating companies certainly indicate that it is forestalling regulation in the sector and an economic slowdown that could slow its growth in the near future. But even with this outlook, confidence in the industry remains. Well thought out regulation ensures that current players and newcomers can build responsible BNPL offers that online shoppers can continue to add to their shopping cart.

Lindsey Appleyard is an Assistant Professor at the Research Center for Business in Society, Coventry University. (This article was originally published by The Conversation.)

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