Buy now, pay later, affordability and the path to regulation
It’s been more than 6 months since HM Treasury confidently announced that Buy Now Pay Later (BNPL) products would move to become regulated by the FCA. In that time we’ve seen statements from the regulator, ministers and the FCA confirming this, with the last of these including a segment on it in their 2022 Business Plan. As yet though, we still don’t have much official word on what form the regulation will take, what the timeline will be and how all of this will impact BNPL providers.
Timing - our guess: May 2022
There are still a few stages to get through before regulatory changes can be implemented. We’d expect the Treasury to run a consultation in the next couple of months on the mechanism for bringing BNPL products under the existing regime and we know that the FCA has committed to doing the same in 2022 (in its business plan). Even with short consultations (which we’d expect them to be), that would rule out anything in Q1 2022 - but there’s a deadline. Ministers have been vocal about this and it’s been widely reported that treasury officials are under pressure to get things moving. All this suggests that the government wants to have this under their belt by the end of the current parliamentary session in July 2022. Anything close to the wire looks risky, hence we’re betting on May.
Scope - What about section 75?
There’s more uncertainty here but it’s clear that the preferred route is to bring BNPL under the umbrella of the consumer credit act (CCA). That would mean affordability checks become mandatory, but the shape of these is unclear - the Woolard review (which will most likely form the basis for elements of the end solution) saves it’s most detailed recommendation for problem / repeat users of unsecured credit (#23 if you want to go read it). We’d read this as a strong indicator that the rules will be toughened across the board with BNPL being held to this new elevated standard. If that’s the case, affordability checks may well need to be able to take into account a user’s exposure to other BNPL providers - CRAs don’t have the data for that, so BNPL firms will need to look elsewhere.
The other big question is around Section 75 of the CCA. This governs the joint liability between credit card providers and merchants to refund users if the goods they buy don’t turn up or are somehow not as described - except the act doesn’t actually mention credit card providers. From our reading it’s hard to see how BNPL products don’t meet the definition of the products that it covers. If that were to happen, BNPL providers would have to take decisive action to protect themselves from fraud.
Open Banking - what role does it play?
BNPL providers are rightly focussed on delivering seamless user experiences and, when implemented in the right way, Open Banking can both extend this experience into the affordability check and provide the creditor with a far superior dataset on which to make decisions.
Whatever the outcome of the inbound regulatory changes, the likelihood of being able to comply by running a soft credit check is vanishingly small. More to the point, it’s not desirable either - at the very least, it’s important that BNPL providers understand the liquidity of people using their service and can assess the risk both of incurring costs through defaults and of placing customers into hardship. Open Banking can provide this data and much more with minimal disruption to the customer journey.
60 days to comply: the regulator has form on this
Back in 2015 the OFT (which handed all of this onto the FCA) hit the payday lenders with a deadline of just 60 days to comply after the rules changed. May 2022 sounds like a long time in the future but, say you’ve got a three-month procurement cycle, you spend three months building and then three months testing and refining to really nail down the UX.
Count that back and that leads you to… now.
How can we help?
It probably comes as no surprise that we're writing this now as we roll out some additions to our affordability solution specifically designed to solve for some of the problems BNPL providers face.
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