Buy Now Pay Later, also known as BNPL, allows consumers to purchase products they want today but cannot afford in full. Instead, they can pay for the product in instalments over time. Some BNPL companies won’t even charge interest for this service, or they will exclude interest but add other fees.
The BNPL industry is especially strong in the UK, USA, Australia and New Zealand. The Reserve Bank of Australia references data suggesting that BNPL transactions increased by 55% between 2019 and 2020.
But are BNPL products a financial pitfall that should be more tightly regulated? We look at the comparisons between BNPL providers and loan providers. Is there really a difference?
Buy Now Pay Later in detail
Using a BNPL provider means the BNPL company pays the retailer for the product on your behalf, and you then owe the BNPL company the money. In one way, it’s a microscopic example of a bank giving you the money specifically to buy a house and then having a mortgage with the bank. However, many BNPL providers don’t charge interest when spreading out repayments, although it should be said that some do.
If you miss a payment, the BNPL company can issue fines, and this can result in debts and growing financial difficulty. BNPL providers facilitate consumer buying power by making money from those who cannot afford to repay. And this has caused some people to want them regulated just like an online loan provider.
Calls for FCA regulation
Loan providers are governed by financial rules and they must do their diligence to ensure the person taking out the loan is in a position to repay. The same cannot always be said about BNPL providers who do not have to complete meticulous credit checks or make personalised assessments on ability to repay. The service is too easily available to the masses.
Forbes has pointed out a related way that BNPL “encourages buyers to overextend themselves”. As lots of BNPL providers exist, consumers can use BNPL to buy multiple products using different BNPL providers without any questions or concerns raised.
Governing bodies and regulators have an opportunity to learn from the past. At one point in time (not so very long ago) a brand new financial product entered the marketplace – the birth of the online loan provider Wonga was, at the time, revolutionary for its speed, accessibility and convenience. Many others were quick to jump on to the lucrative business model which quickly spiralled out of control with people getting access to volumes of credit they realistically couldn’t pay back. This caused immediate problems until the FCA implemented reforms. The online loan industry has since benefitted from sweeping regulation changes to help ensure their loans are safer for those that use them.
The same historic problems could arise if BNPL providers continue to provide their service without being subject to FCA regulations. And that is why some experts are urging the FCA to get involved and include them within tighter regulations. This will protect the companies involved, but most importantly, it will safeguard consumers.
If BNPL were subjected to FCA regulations, they may be forced to reject vulnerable people wishing to use BNPL to make purchases. Therefore, fewer people would get themselves into unforeseen debts and financial difficulties in the future.