The BNPL consultation in the UK has now been closed. What did it cover and what does it mean for banks?
In February 2023, the UK government published a consultation on the Buy-Now Pay-Later (BNPL) Services Bill, which outlined the scope of the proposed legislation, as well as some exemptions.
The proposed legislation is intended to prevent consumers from falling into unmanageable debt while giving them the option to spread the cost of their purchases over a longer period of time. This is a welcome milestone amid the cost of living crisis in this age of high inflation and interest rates.
building on the Woolard Review in 2021 and the subsequent response to the consultation in June 2022, the latest consultation on the bill suggests that the regulation will be limited to fixed-sum credit and interest-free reimbursable installments provided by third-party lenders. This is a change to their previous position and means that deals offered directly by merchants would be out of reach either online or remotely. Trade credit is also currently exempt from this regulation.
Furthermore, it outlined that those in scope would be subject to controls, including provisions for financial promotions, creditworthiness assessments, and pre-contractual requirements.
Expected in the second half of the year, the legislation, as it stands, aims to ensure that BNPL providers operate in a fair and transparent manner. Below, we’ve outlined why affordability checks, complaint management, credit reporting, collection rate caps, and advertising are just a few of the key considerations you should pay close attention to.
According to the bill in its current form:
- Affordability Checks: BNPL providers must be required carry out more extensive affordability checks before entering in an agreement with a consumer. They will need to assess whether the consumer can afford the rebates and make sure that the arrangement fits their financial circumstances. The FCA is determining how current solvency rules should be adapted to BNPL.
- Claims management: To protect consumers from falling into debt trouble, BNPL users will be able to take their complaints about the conduct of BNPL providers to the Financial Ombudsman Service (FOS) as described in the bill.
- Charge Limits: There should be limits on Late payment fees and other charges, with pre-contractual requirements Provide straight and transparent information about these charges up front. As such, consumers ought be better informed about the costs of using BNPL and No subject to excessive penalties.
- Credit report: BNPL providers are required to report their customers’ payment performance to credit reference agencies. This would do Allow consumers to build their credit scores, which are useful when applying for future loans or other credit products.
- Regulation of Advertising: The Financial Conduct Authority (FCA) probably have the power to regulate BNPL’s advertising to aid make sure it is clear and fair, it’s not misleading and provides consumers accurate and relevant information.
Impact on BNPL providers
BNPL providers are likely to bear the financial burden of the proposed legislation. The additional operational costs incurred to enable credit reporting will be compounded by the need to invest in affordability controls to ensure your BNPL agreements are compliant.
Suppliers may also need to re-evaluate BNPL products, balancing new operating costs with the likelihood of basket sizes shrinking as consumers become more conservative with their spending and reluctant to submit to financial controls. This could see a reduction in BNPL options at checkout as providers look to reduce overall costs.
Impact on banks
While traditional BNPL providers will likely need to make significant changes to align with the upcoming regulation, banks may find themselves in a good position against the legislative change as they will be FCA compliant from the outset.
we have previously explored how banks can succeed with BNPL. With their large balance sheets and strong checks and balances, banks are truly best placed to capitalize on their trusted brand to promote responsible lending products.
“Although less than 3% of consumers worldwide use (BNPL) for most of his big ticket shopping today, a an additional third said that he would be more willing to do it if it was offered by his main bank.”
– Accenture Global Consumer Payments Survey 2022
Impact on consumers
The expectation of greater transparency and flexibility through regulated announcements and capped fees will help consumers make more informed decisions about the full cost of BNPL, key to protecting them from excessive debt and financial hardship. That, along with the prospect of building credit scores over time, will be welcomed by consumers.
As final rulemaking approaches, it is imperative to continue to closely monitor this space for major changes to what has been communicated thus far. There is no doubt that the upcoming regulation will lead to a more responsible and sustainable BNPL sector, a change that we hope will be welcomed in the face of economic uncertainty.
Contact me to see how your business would fare before the upcoming BNPL legislation.
To find out how your bank can responsibly offer BNPL, read our report, Finding success with BNPL: strategies for banks to get it right. And for strategies to stay relevant in payments, read Payments get personalour report on our latest global consumer payments survey.