|Buy-it-now and pay-later providers have been criticized for performing minimal credit checks and not doing enough to protect consumers.
UK banks are pushing the buy-now, pay-later market in hopes that upcoming regulatory developments will curb the sector’s worst excesses and provide opportunities for new entrants.
Main lenders As Barclays PLC and NatWest Group PLC have recently launched buy-it-now, pay-later or BNPL services, while fintech challenger bank Zopa Bank Ltd. also entered the market.
The UK BNPL market is growing at an annual rate of 60-70% and accounts for 5% of e-commerce transactions, according to a 2021 report by Bain & Company. According to the report, the value of UK BNPL transactions reached £6.4 billion in 2020, while a May 2022 report from Global Data said the global market reached $120 billion in 2021. .
Banks are keen to capitalize on this growth opportunity, but have been reluctant to do so until effective regulation is in place. A recent review by the UK’s Financial Conduct Authority and subsequent announcement of new regulations for the sector means banks are increasingly keen to get involved.
BNPL’s incumbents have been criticized for carrying out no, or minimal, credit checks and to do little to educate customers about the nature of the product and the risks of using it. The Financial Conduct Authority’s review which preceded the announcement of the regulations said a change was urgently needed to protect consumers.
“For banks, the introduction of regulation will create opportunities rather than risks as it levels the playing field for all participants,” said Zopa Chief Commercial Officer Tim Waterman.
BNPL allows consumers to spread the cost of a purchase over a period of time, often without interest.
The UK government acted after regulatory review revealed the potential for high levels of debt and the absence of any requirement for BNPL companies to undertake consumer credit assessments. BNPL providers often apply a “soft” credit check which is faster for customers but would not meet existing regulatory requirements.
Debt advice charity StepChange said the ease with which BNPL was offered to consumers was a concern.
“There’s often a lot less friction at checkout when someone uses BNPL than when they use a debit card,” said Richard Lane, director of external affairs at StepChange. “Also overwhelmingly, most people don’t recognize they have taken out credit when using BNPL.
A step change A survey showed that 31% of current and former users said BNPL had put them in unmanageable debt. A survey by the charity Citizen’s Advice showed that more than 40% of users had borrowed money to make BNPL payments, with 26% using credit cards to pay. The survey also showed that 8% used BNPL to pay for essentials such as groceries.
The regulations will see the introduction of accessibility controls and BNPL providers will need to be approved by the Financial Conduct Authority. But this is not expected to be introduced until early 2024.
Barclays has urged existing suppliers to act before the regulations are imposed. “There is nothing stopping the industry from adopting more forward-thinking policies such as stronger credit checks and reporting of loans to credit reference agencies,” said Antony Stephen, CEO of Barclays Partner Finance, per e -mail.
BNPL operators can generate revenue from commissions charged to stores and late fees from consumers. Management consultancy Accenture has estimated that on average 25% of BNPL’s vendor revenue comes from these methods.
BNPL provider Clearpay charges £6 after a seven-day payment term for products under £24, and 25% for products over £24, capped at £36. His peers Laybuy Group Holdings Ltd. and Openpay Group Ltd. charge a late payment fee after 24 or 48 hours from the payment due date.
All of these companies have changed the terms of their contracts to make them fairer and simpler after a review by the Financial Conduct Authority.
This wave of new entrants comes as one of the industry’s largest incumbents faces increasing challenges. Swedish-based Klarna Holding AB (publ) achieved a post-money valuation of $45.6 billion after a June 2021 funding round, making it Europe’s most valuable fintech. A July 2022 investment round saw that value drop to $6.7 billion.
The company reported a loss of 7.1 billion Swedish crowns ($748 billion) for 2021, compared to 1.4 billion crowns in 2020. Credit defaults accounted for a high proportion of those losses in 2021, at 4. 6 billion crowns, compared to 2.5 billion crowns in 2020. .
Klarna said the losses were due to its rapid expansion into new markets and a massive influx of new customers. The company had 150 million active users in the first quarter, up 60% year-over-year.
Klarna made its 2022 business plan in the fall of 2021, but the world has changed dramatically since then, CEO and co-founder Sebastian Siemiatkowski told his staff. There had been a sharp rise in inflation, a very volatile stock market, and there was probably a recession. It said it planned to lay off 10% of its 6,500 employees.
Klarna’s business model has also come under attack, with Barclays pointing to the company’s high level of chargebacks and losses, The The telegraph of the day reported.
“They don’t do the due diligence for their customers after they book these loans, but we think the regulations will change that for everyone,” Zopa’s Waterman said.
Klarna has denied the charges and criticized Barclays for its BNPL deal with Amazon, which allows users to spread the cost of their purchases but also charges 10.9% interest. It says its way of working compares well with banks and credit card providers.
“Unlike traditional banks, which profit when people can’t repay, our business loses when people can’t repay, so we provide the safeguards to enable responsible spending with protections built into our products,” said a Klarna spokesperson via email. Klarna does not charge late fees, but the debt could be forwarded to debt collection agencies.
Indeed, credit card providers are likely to be threatened by the BNPL. A Bain & Company survey found that 49% of UK respondents in the 25-34 age category used BNPL, while 51% used credit cards. BNPL also has a significantly higher Net Promoter Score than Credit, meaning people are more likely to recommend it to others, Bain & Company found.
A survey by The Ascent, a unit of financial website Motley Fool, showed that 67% of users thought BNPL could replace their credit cards, although only around a third would like that to happen.
Banks can compete by enhancing existing credit card options to offer some of the flexible financing types that make BNPL attractive, Accenture said. He noted that Citigroup Inc. in the United States has launched Citi Flex Pay, which allows credit card customers to make fixed monthly payments for a fixed term.
“Banks need to give customers the choice to pay by whatever means they prefer – whether that’s a credit card, debit card, mobile wallet or cash loan. point of sale – and [ensure] that these payment methods are accepted wherever customers like to shop,” said Stephen of Barclays.
Still, new entrants may have to take into account the challenges faced by Klarna and the deteriorating economic environment. Waterman said rising interest rates aimed at tackling soaring inflation will hurt the BNPL market this winter as consumer purchasing power suffers.
“There was a race to the bottom in the BNPL market because vendors focused on growth rather than margin,” Waterman said. “As interest rates rise, the cost of funding increases and margins are squeezed even more.”
As of August 5, US$1 was equivalent to 10.23 Swedish crowns.