The Financial Inclusion and Markets Centre (FIMC) has submitted a response to the FCA’s consultation on buy now, pay later (BNPL) lending. The submission can be found here: FIMC FCA BNPL Sept 25 final
Summary of our submission
Buy now, pay later (BNPL), [1] sold well and used well by consumers, can be useful and enhance consumer welfare. But, as the FCA consultation document rightly highlights, a significantly higher proportion of BNPL users display characteristics of vulnerability compared to the general population and the sector also has high levels of arrears.[2] This is a particular issue for frequent BNPL users. There is also evidence of BNPL-facilitated overconsumption causing significant post-purchase regret amongst consumers.[3]
The evidence of harm and risks in the market (the vulnerability of users, the levels of arrears and financial distress, and the fact that key BNPL lenders are not used to operating in a properly regulated market) warrants a very robust approach to regulation.
A robust regime will not deter consumers who can afford to use it from selecting this option if it genuinely offers the better alternative. A robust regime may well slow down the process of accessing BNPL across the market and cause consumers to reflect before making a purchase. If this addresses negative behaviours such as overconsumption and impulse buying, even amongst consumers who can afford BNPL at a given point in time, then this would surely be a positive outcome. This would also create positive environmental impacts.
Some may argue that, as people who live in the most deprived areas of the UK are more likely to be BNPL users, this is an inclusion-positive product. However, true inclusion and innovation enhances overall consumer welfare for excluded, marginalised, or vulnerable consumers. That cannot be said for large numbers of BNPL borrowers. The fact that BNPL is heavily used in areas of greatest deprivation is more likely a reflection of financial distress and firms exploiting those opportunities than a sign of the market enhancing consumer welfare or providing a social good.
We support a number of the FCA’s proposals particularly around assessing creditworthiness and affordability. But, the FCA has not fully addressed the harm caused by the inherent product design and associated business models. BNPL is a form of embedded finance which is expressly designed to remove the barriers to selling consumer credit and aims at ‘smoothing the customer journey’. BNPL enables firms to exploit consumers’ behavioural and psychological biases and can encourage detrimental behaviours such as impulse buying and overconsumption. To put it another way, the source of the harm is designed into the very nature of the product.
The experience of the payday lending sector shows us that making it easy for people to borrow was one of the root causes of so much harm in that market. So, rather than aiming for a ‘smooth customer journey’, if anything, the FCA should be aiming to inject more friction and clear break points into the BNPL sales process than the measures proposed in CP25/23 are likely to achieve. In other words, to be effective, the FCA should set out to basically disrupt the current BNPL product format and business models of firms.
As the FCA points out, even with the FCA’s proposals, BNPL will retain a competitive advantage. So, injecting friction and break points into the BNPL sales process will also help promote a level competition playing field between BNPL and other forms of lending.
The inherent risks with BNPL, the vulnerability of the target market, and the fact that BNPL lenders do not have experience of regulated lending, would also suggest that the FCA should apply a tougher approach to authorising BNPL lenders and setting fitness and propriety standards for BNPL boards and senior managers. Care will need to be taken that the Temporary Permissions Regime is robust enough to prevent BNPL lenders from exploiting consumers in the run up to full regulation.
The FCA should also take the opportunity to require BNPL lenders (and other lenders) to address the issue of satisfying county court judgments (CCJs). According to Registry Trust Ltd (RTL) there are 5.4 million judgments currently outstanding.[4] Yet, only 12% of those are marked as ‘satisfied’.[5] We urge the FCA and other regulators to introduce rules (or even guidance) requiring creditor firms to inform the courts that a debt has been settled. This very small change could have a significantly beneficial effect on consumers’ financial well-being. The Woolard Review recommended that the FCA consider such a rule as far back as 2021.
It is unfortunate that the Government has decided that regulation will apply to only third party providers. This leaves a significant gap in consumer protection in this market. We could end up with two tier consumer protection and competitive distortions. We would urge the FCA to pressure the Government to reconsider this decision.
We think the FCA underestimates the contribution robust regulation of BNPL could make to addressing sustainability-related harms. The overconsumption and impulse buying enabled by BNPL not only directly harms consumers it creates externality costs by contributing to sustainability-related harms.
It is disappointing to see the FCA frame regulation as a burden in yet another publication. Regulation is not a burden. It is the social licence firms require to operate in a market. Sometimes that licence has to be robust given the nature of the product and the tendency of suppliers of that product to cause consumer harm. Consumer credit is one such market and the way BNPL, as a form of embedded finance, is sold creates particular risks.
[1] We appreciate why the FCA uses the term Deferred Payment Credit (DPC). We continue to refer to BNPL as this is the commonly used term.
[2] For example, according to the FCA’s Financial Lives 30% of adults with low financial resilience were BNPL users compared to 20% of adults generally. Analysis of CRA data found that BNPL users were twice as likely to exhibit measures of financial distress (including being in arrears) compared to non-users. For details see p68 of CP25/23.
[3] According to UK research, over a third (35%) of BNPL users say they often make impulse purchases they later regret, compared to just 17% of non-users. Consumers lack awareness of the costs of BNPL, says the LSB – LSB Research from the USA found that that more than half (57%) of users say they have regretted making a purchase through BNPL as the item was too expensive. Buy Now, Pay Later Statistics and User Habits | C+R
[5] From Data to Change — What We Learned from Listening to People Talk About CCJ Satisfactions