Financial Inclusion Centre has submitted a response to HM Treasury’s consultation on the regulation of buy now, pay later (BNPL) products. We very much welcome the Government’s decision to regulate BNPL and the determination to act quickly.
Our submission can be found here: HMT BNPL Condoc FIC submission 1124 final
As a non-profit organisation which focuses on financially vulnerable consumers and those poorly served by financial services, we have been concerned that these consumers have been left for too long without meaningful consumer protection when using BNPL.
Access to fair, affordable, and sustainable credit that is socially useful and enhances consumer welfare is a critical element of financial inclusion and resilience. We emphasise social utility and enhancing consumer welfare as genuine financial inclusion is more than just about the numbers of consumers potentially having access to credit, or with credit. The fact that consumers can have easy access to certain forms of credit – or, more accurately, can be targeted with certain forms of credit as retail finance is supply side driven not demand led – is not necessarily welfare enhancing. Payday lending was a case in point.
Unregulated or poorly regulated consumer credit can create overconsumption of credit which can undermine consumers’ propensity to save and build financial resilience. If it is too easy to borrow, it can make it hard to save. Overconsumption of credit can result in overindebtedness, leave consumers financially struggling, and exacerbate existing financial vulnerabilities. FCA research has found that adults with characteristics of vulnerability were more likely to report using BNPL, and that 44% of the
most frequent users of BNPL were over-indebted. 1
BNPL is a form of ‘embedded finance’. Embedded finance exploits the fact that the focus of the consumer is on obtaining the necessary or desired goods and services, not on the utility of the credit which facilitates access to those goods and services. BNPL providers have been very successful at removing any transactional friction that can cause consumers to consider carefully the decisions and choices they make.
It can also have negative impacts on consumer focused competition. It allows well-resourced commercial for-profit credit providers operating to lower regulatory standards to crowd out non-profit community lenders such as credit unions and CDFIs who may be better placed to offer more appropriate credit.
However, we are concerned that the regulation will only cover third party providers of BNPL. We argue the new regime should apply to BNPL generally not limited to third-party lenders. Increasingly, there is a blurring of the lines between finance and technology, and finance, technology, and retail consumer markets (‘embedded finance’ – see above). Yet, the intersection between these markets is poorly regulated. Including only third-party lenders would create an obvious risk that big tech or e-commerce platforms would move into this market and exploit the fact that they did not have to operate to the same standards as regulated providers.
We also argue that, given the risks with embedded finance, the FCA will have to find a way to inject some ‘friction’ into the customer journey to prompt consumers to think carefully about using BNPL before committing to the transaction.