The regulatory horizon for interest-free, buy now, pay later credit providers and what you should know before offering your customers a ‘pay later’ option
In recent years you may have noticed a new payment method is increasingly being offered by online retailers giving you the option of buying now and paying later (“BNPL”) or spreading the cost of an item over a number of payments, and all interest free.
The main players in this arena are Klarna, the Swedish registered, Snoop Dogg backed, tech unicorn, Clearpay and Laybuy. Klarna and Clearpay’s main offerings do not charge any form of fee to the consumer and Laybuy only charges late payment fees (currently £6). It is estimated that 7 million people are now using these services in the UK. Klarna’s ‘Pay Later’ product allows consumers to pay for goods 2 or 4 weeks after receiving the goods (depending on the retailer). This gives consumers the convenience of trying on clothes at home and sending back those that they do not want, all without being charged for the goods (as long as they inform Klarna). For ‘Pay Later’ Klarna carries out a soft credit check on consumers, if a consumer misses a payment, there are no charges, but it may impact their credit score. According to a report by the Money Advice Trust only 27% of people aged 18 to 25 know what their credit rating is and how it affects them.
If BNPL providers are not charging interest, then how are these companies making money?
These types of businesses do not charge interest to consumers and so this part of their services is not subject to regulation by the FCA. Instead, they take merchant transaction fees directly from the retailers, as retailers hope that this easy-to-use system will encourage greater spending by the consumer. The average value of orders becomes significantly higher when this method of BNPL is available to the consumer. Klarna claims that it can increase the average online store’s orders by 30% and the average customer spend by 34%.
Recently, a number of debt charities have raised concerns that these BNPL providers make it too easy for young people to spend money and allow them to get ‘carried away’ and over-estimate what they will be able to afford to pay off at a later date.
While this form of credit is preferable to traditional store cards with eye-watering interest rates, consumers can still find their credit score being impacted if they miss a repayment or delay in paying or their case being referred to a debt agency if unpaid for several months. Interest may also be payable if the balance is not repaid in full during the interest free period.
You need to avoid inadvertently acting as a credit broker
Retailers need to take great care when incorporating these offerings into their business and be clear on whether or not they need to become registered as a credit broker, while you would not have to be authorised as a credit broker to offer Klarna’s Pay Later, you may for some of Klarna’s other products. Credit broking goes far wider than many people would think, and permission is even required to broker some exempt agreements (ie. non-regulated).
In 2018, the mattress retailer Casper got into trouble with the FCA for offering its customers the ability to pay via Klarna’s ‘Slice It’ plan without having been authorised by the FCA as a credit broker (or acting as an appointed representative, where permitted to do so) to allow them to introduce customers to Klarna’s service. The plan gave customers credit at zero percent interest if they paid off their balance within six or twelve months. ‘Slice It’ performs a hard credit check on consumers and if a consumer misses a payment then a fee or interest may be payable. Klarna is primarily regulated by the Swedish Financial Supervisory Authority, but has operated in the UK as an EEA authorised firm since January 2019, which means it is required to comply with some FCA regulation.
Is there any regulation on the horizon?
Last year the FCA introduced new measures to stop BNPL firms from charging backdated interest on amounts already paid and to require BNPL providers to prompt consumers before any charges become due. Other than the requirement to now prompt the consumer before any late payment fees are due in the case of Laybuy, these measures have no impact on Klarna and Clearpay’s interest-free offerings.
These BNPL services have been popular in Australia for a few years, the Australian regulator has found that “one in six users had either become overdrawn or borrowed additional money because of a buy-now-pay-later arrangement”. In Germany and Austria, BNPL is now more popular than payment by debit card. While the FCA has expressed that it has no intention to introduce regulation for these arrangements at the moment, that is not to say that they will not in future, particularly as they grow in popularity and charities continue to scrutinise them publicly. The FCA is likely to keep an eye on these kinds of services and how well the providers communicate with consumers and potential risks, particularly where a provider has a mix of both regulated and unregulated offerings. Also, the FCA has flagged in its Business Plan for 2020-2021 that the consumer credit market is one of its 5 key priorities for the next 1-3 years.
In December 2019, former pensions minister Baroness Altman stated that she would like to see the FCA insisting on cooling-off periods and affordability checks before customers were allowed to take on any debts.
In order to avoid consumers having negative experiences when shopping on your site, retailers should make sure they do their due diligence on BNPL providers and make sure that these providers are acting responsibly in keeping consumers informed of any charges that might be payable in connection with delaying payment for their purchases. Offering consumers greater flexibility and the ability to try before they buy is a positive move, but retailers and BNPL firms have a responsibility for arming consumers with all the information they need before clicking the ‘pay later’ button.
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