A brief on BNPL
Buy now pay later (BNPL) is a type of short-term financing. As the name suggests, it allows users to purchase items and pay for them at a future date, often interest-free.
Unlike credit cards, BNPL does not require users to undergo credit checks before making online purchases, and registering for BNPL can be as easy as creating an online account.
BNPL gained significant traction while the pandemic was in full swing. The global health emergency is therefore credited for its massive growth in 2020 when the use of this payment method nearly quadrupled to £2.7 billion in the United Kingdom and $24 billion in the United States. These numbers are expected to increase further this year and suffice to say, BNPL will remain relevant in the years to come.
This may explain the mass influx of BNPL users and its popularity among younger people, or those aged 18 to 36. According to the Financial Conduct Authority (FCA) – Britain's financial regulator – this age cohort accounts for over 70 per cent of BNPL users in the country, 75 per cent of whom are female, and with 90 per cent of transactions related to fashion and footwear purchases.
In many cases, customers also buy more than what they can afford, causing them to experience difficulties in repaying their debts. Some even fail to make payments, which see debt collectors knocking on their doors. This raises the question of whether BNPL should be better regulated and whether such regulations would prevent customers from overspending and accruing excessive debt while protecting retailers from potential losses.
Why it must be regulated?
As previously mentioned, the misuse of BNPL may cause customers to overspend and rack up unnecessary debt. Companies meanwhile saw a large number of BNPL users falling behind in their payments impacting their bottom lines.
A review by the FCA showed that customers are easily exposed to debts of as much as £1,000. Companies are meanwhile accused of misleading advertising, which may lure prospective borrowers to overextend themselves, especially those who do not fully understand the interest-rate scheme.
Although the value of the average BNPL transaction with most providers tends to be low, there is an unhealthy tendency for customers to sign agreements with multiple BNPL providers, thus leading to an accumulation of unnecessary debt.
A more regulated BNPL scheme is needed to protect both customers and companies from doing financial harm to each other. At the same time, this might limit the use of BNPL. However, it is important to note that new measures will also affect BNPL providers, who benefit from the scheme via fees from companies. These providers are also heavily reliant on repeat transactions by customers. It is further important to consider that the tendency of some customers to sign multiple agreements with BNPL providers must be prevented to avoid debt accumulation.
Moreover, the potential impacts must be carefully considered before hammering out any new regulations on BNPL. But most importantly, regulations must not only be applied across all sectors but must not limit customers from availing themselves of the BNPL payment method. Overly strict regulations may stop people from using this payment method.
The ideal, therefore, is to strike a balance between protecting both customers and companies. Earlier this year, government officials in the UK expressed their intention to regulate BNPL by requiring customers to undergo affordability checks, meaning that potential borrowers must not only ensure that they can comfortably repay the additional debt but that their finances are healthy. The new regulations are expected to take effect in 2024.