Metrics Monthly Q1 | 21


The road to regulation

Buy Now, Pay Later has been a hot topic over the past few months, with usage of the payment method quadrupling in the UK last year alone. Recent figures from Worldpay show that BNPL is the fastest-growing online payment method, and 5 million people are estimated to have used the option to make purchases since the start of the pandemic last year. The increased popularity of BNPL can be attributed to several factors. For one, BNPL allows consumers to stagger payments across weeks or months, providing a more affordable option for many, especially during the pandemic when many jobs were at risk and one in six homeowners used payment defer- rals (or "mortgage holidays") to ease financial pressure in the first lockdown. Prior to the pandemic, the travel indus- try in particular massively benefitted from consumers' abilities to spread the cost of holidays, and is expected to see increased usage in 2021 as travel restrictions are eased. Travelers are

able to use BNPL to book trips early, when prices are typically lower, and repay in monthly instalments, offering a more flexible payment option. Another highly appealing factor of BNPL is that many firms, such as online shopping giant Klarna, offer the service inter- est-free, making the service cheaper to other forms of credit, which can have varied interest rates. There's not always gold at the end of the interest-free repayment rainbow, however, and this quarter we saw the BNPL model face scrutiny as the Finan- cial Conduct Authority warned that billions of pounds were being lent in unregulated transactions, putting many customers at a greater risk of getting into financial difficulty. In a review of the unsecured credit market led by Christopher Woolard, the potential harms of BNPL services were brought into the spotlight, and this led to the Government deciding to bring the service into regulation by the FCA in an attempt to mitigate these risks. The Woolard Review found that it would be easy for shoppers to accrue thousands

of pounds worth of debt by taking out multiple agreements with different providers, and the majority of this debt would be invisible to credit reference agencies and mainstream lenders. This creates a risk that consumers can end up taking on unaffordable levels of debt with less protection in place than regular loans. The rapid rise and ease of use of BNPL has resulted in consumers being less informed about the service, with many not realising that they were taking out credit agreements that could result in late payment fees. One bank showed that 10% of customers who used BNPL had already ended up in arrears. One of the key issues with the service is that consumers are not subjected to credit or affordability checks, like they would be with other forms of lending, and the payment deferral method simply appears as another payment option upon checkout. The Woolard Review, then, proposed that BNPL products become subject to FCA credit rules, such as providers having to carry out a credit check or affordability test when customers opt to use the service.

18 | Metrics Monthly

Q1 | 2021

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