This month, the Financial Conduct Authority (FCA) published its review of the Buy Now Pay Later (BNPL) sector – The Woolard Review, which looks at how regulation can better support a healthy market for unsecured lending.
This review was triggered by the explosion of the BNPL sector over the last few years and further fuelled by the COVID-19 pandemic. As is well known, incumbent BNPLs typically operate on a FCA exemption and are thus not regulated, which appears to have resulted in attracting the ire of consumer advocacy groups. It is safe to say, regulation in the industry was inevitable and from my viewpoint, it is a positive move. Understanding the significance of regulation, we built Zilch with it in mind from the start, working hand in hand with the FCA for over a year to achieve a consumer credit authorisation in September 2020, making us the only regulated provider in the UK.
To fully service the market and ensure the customer always comes first, we must now look to other suppliers to step up and provide an offering that falls in line with coming regulation. The FCA has brought attention to helping BNLP players progress and be better for the consumer and there are a number of ways the industry can build on this.
The need for responsible Buy Now Pay Laters
Buy Now Pay Later providers offer a helpful way of managing finances and are a fast-growing component of the finance industry, not just in the UK but globally. The reason behind their popularity is the fact they give consumers a way of accessing affordable credit without the hassle that comes with credit cards, allowing them to easily borrow what they can afford to give back in small amounts. This way of borrowing has opened up credit to those who would have previously been denied it in a safe way. Unlike payday lenders and high-interest credit card systems – BNPL players democratise free credit to allow more people to borrow amounts they can pay back without the nasty interest rates or fees associated with other methods of borrowing.
However, as with any rapidly growing industry, the BNPL space is experiencing its own growing pains. As the agreements become more popular, it is essential that consumers are protected. For that reason, regulation ensures people are treated fairly and only offered agreements they can afford – the same protections you’d expect with other loans. I think you’d be hard-pressed to find a provider that cannot see the sense in this.
While there has been a mixed reception to the news that regulation is coming to the industry, it is my view that this a welcome first and critical step towards putting consumers at the front and centre of these transactions. Perfectly summed up by John Glen, Economic Secretary to the treasury, who said, “Buy-now-pay-later can be a helpful way to manage your finances but it’s important that consumers are protected as these agreements become more popular. By stepping in and regulating, we’re making sure people are treated fairly and only offered agreements they can afford – the same protections you’d expect with other loans.”
Potential impact on incumbent providers
While the FCA has announced stricter regulation will be coming to buy now pay later providers in the UK, they are yet to outline exactly what this will entail. There is no solid roadmap for non-regulated providers as of yet and the truth is, the regulation could take many different forms. What we could see is stricter regulation resulting in a slowdown in consumer usage and registrations. If this happens, it would lead to a cut of one-time buyers, who can sometimes register without the full knowledge of what they are signing up for when the provider is integrated at the checkout page. Additionally, if limitations on the checkout page come into play, it will mean BNPL checkout buttons will be restricted on the page – a good thing for consumers who do not have to deal with a ‘Christmas tree’ of various providers to choose from. However, this does mean smaller players might be cut out in what will be a ‘race to zero’ with retailers.
There could also be other limitations on the checkout page; increased friction during the checkout process as first time registrations could require more steps and checks – this will impact customer conversion and likely increase onboarding costs too. Additionally, it is possible new restrictions could require pre-contract information to be provided to customers who will need to be made completely aware of the consequences of taking BNPL credit. With that in mind, a slow down on impulse buying would occur as ongoing affordability checks will add more noise to the checkout journey.
Action for BNPL providers
As Zilch’s focus has always been putting the consumer first, we had the foresight to work with the FCA to obtain our full credit licence right from the start. To achieve this, we entered into the FCA sandbox programme back in 2019 – before our product was even built. This is one of most innovative regulatory programmes I’ve ever encountered – the thorough practice and transparent process makes every step a valuable part of the journey. I was grateful to be a part of such a forward-thinking programme and would encourage any business to go down this route.
While it is uncertain exactly what regulation requirements will come into play I have full faith in the decisions of the FCA and believe regulation for the whole industry can only ever be a good thing. Ultimately, we must not have a scenario that drives consumers back to using high-cost credit. We care about our customers and firmly believe in credit where credit is due. Regulation is the first – and arguably most vital – step in the right direction.
By Philip Belamant, Founder and CEO of Zilch