‘Buy now, pay later’ takes center stage as high street banks step in

High street lenders are being drawn in part by an apparent generational shift among Millennials and Gen Z consumers, away from credit cards and towards BNPL. If they don’t adapt to changing spending habits, they could risk cutting off future revenue streams.

Chris Taylor, Head of Consumer Lending at Virgin Money, says: “We want to attract a younger demographic that we desire a lifelong relationship with and help them build a credit profile for the future, unlike unregulated BNPL providers who offering customers only a fleeting credit mechanism at the point of sale.”

In a review of regulation for BNPL, the Financial Conduct Authority (FCA) said the payment option “presents a viable alternative to payday loans and other forms of credit” but also “poses significant potential consumer harm.”

His research found that “some” customers don’t see BNPL as a loan, more associating it with debit cards and payment methods like Apple Pay. The regulator quoted a major, unnamed UK bank as saying that 10 per cent of the 677,000 personal account customers who made a payment to two of the major BNPL providers in November 2020 had exceeded their overdraft limit in the same month.

Inflation could even result in interest rates for the hardest-hit customers hit with late payment fees as BNPL providers seek to lock in their margins.

Such concerns have prompted trade body UK Finance to push for further regulation, which is currently being discussed in the Treasury under legislation passed in 2021.

A spokesman for UK Finance said: “The most important piece of legislation in this area – the Consumer Credit Act (CCA) – is now almost 50 years old and in need of fundamental reform. We have been campaigning for this for a long time.”

Some BNPL providers say they are not opposed to tighter regulation.

“Regulation cannot come soon enough to protect consumers as more providers enter the space,” says Alex Marsh, Head of Klarna UK. “For our part, we have introduced a number of changes to better support consumers, including clearer terms and conditions, checkout information and the establishment of an internal complainant.”

He insists Klarna has taken the report’s advice to heart “not to wait for regulation”. Earlier this month, the fintech firm announced it would report customers’ purchases to credit bureaus.

As traditional players enter the space, some argue that unregulated BNPL providers do not have to comply with the same strict consumer protection laws as banks. Anthony Stephen, chief executive officer at Barclays Partner Finance, says it’s “not a level playing field”.

He adds, “All loan originations should be reported to credit bureaus at the time of purchase so that other lenders can get an accurate picture of the customer’s monthly loan obligations.”

According to the FCA, most BNPL providers conduct a very basic credit check that focuses on risk rather than what is affordable for the consumer. However, Stephen is not optimistic that regulation will offset and potentially penalize lenders on the high street.

“The main problem is that the government may apply a different level of regulation to short-term, low-interest products than to more traditional offerings like credit cards,” he says. “This creates an unnecessary two-tier regulatory framework that runs counter to consumer interests.”

About Bradley J. Bridges

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