‘Buy now, pay later’ rules could exclude millions, warn consumer groups

The UK's Buy Now, Pay Later (BNPL) market, which grew from $60 million in 2017 to over $13 billion in recent years, is now subject to Financial Conduct Authority (FCA) regulation as of July 15. This monumental overhaul, five years in the making, aims to increase consumer protection by mandating that BNPL providers, such as Klarna, Zilch, and Clearpay, be authorized by the FCA and conduct thorough affordability checks. These checks will require firms to scrutinize consumers' incomes, spending habits, and existing financial commitments to ensure they can manage new debts, introducing greater friction into the borrowing process.

The new regulations are expected to have a significant financial impact, with the FCA estimating a $1.4 billion cost for BNPL providers. This includes $929 million in lost profits from tougher creditworthiness checks, $204 million in direct compliance costs, and a $243 million drop in revenue from late fees as affordability checks reduce the incidence of missed payments. Merchants, including major retailers like Asos, Boohoo, Argos, and Currys, are also expected to face a similar hit from lost profits as more consumers abandon purchases due to stricter checks.

While the new framework is largely welcomed by industry veterans and consumer advocates for bringing much-needed oversight, it has raised concerns about financial exclusion. Financial inclusion group Fair4All Finance projects that these stricter checks could exclude up to 30% of the nearly 11 million BNPL users in the UK, potentially impacting 1.6 million shoppers. Debt charity StepChange's research aligns with this, suggesting that 1.65 million people who used BNPL in the past year might now be blocked. Some fear that individuals reliant on BNPL for essentials, or those who are merely unbanked, could be pushed towards more expensive or unregulated alternatives like loan sharks.

Under the new rules, consumers will benefit from enhanced rights and protections. Lenders must provide clear upfront information about payment schedules and consequences of missed payments, and offer support to those in financial difficulty, including directing them to free debt advice. Crucially, consumers will now have recourse to the Financial Ombudsman Service (FOS) for unresolved complaints and will be able to claim refunds and compensation for faulty goods over $100, similar to credit card protections. BNPL providers will also need to be able to test affordability for individual transactions instantly.