High street lenders are in part being attracted by an apparent generational shift, among Millennials and Gen Z consumers, away from credit cards towards BNPL. Failure to adapt to changing consumption habits could lead them to reduce their future sources of income.
Chris Taylor, Head of Consumer Lending at Virgin Money, says: “We are looking to attract a younger demographic, who we would like a lifelong relationship with, by helping them build a credit profile for the future, unlike BNPL’s unregulated providers who offer customers only an ephemeral point-of-sale credit mechanism.
In a regulatory review for BNPL, the Financial Conduct Authority (FCA) said the payment option “has provided a meaningful alternative to payday loans and other forms of credit”, but also “represents significant potential harm to the consumer”.
His research found that “some” customers don’t view BNPL as credit and associate it more closely with debit cards and payment methods, such as Apple Pay. The regulator quoted a major unnamed UK bank as saying that 10% of the 677,000 personal account customers who made a payment to two of BNPL’s major providers in November 2020 exceeded their overdraft limit that same month.
Inflation could even drive up interest rates for hard-hit customers struggling with late payment fees as BNPL suppliers try to preserve their margins.
Those concerns prompted trade body UK Finance to push for new regulations, which are currently in Treasury consultation following legislation passed in 2021.
A UK finance spokesperson said: “The main piece of legislation in this area – the Consumer Credit Act (CCA) – is now nearly 50 years old and in need of fundamental reform. It’s something we’ve stood for for a long time. »
Some BNPL suppliers say they do not object to stricter regulation.
“Regulation can’t come soon enough to protect consumers as more vendors enter the space,” says Alex Marsh, director of Klarna UK. “For our part, we have introduced a series of changes to better support consumers, including clearer terms and conditions, payment information and the creation of an internal complaints arbitrator.”
He insists that Klarna has taken the report’s advice “not to wait for regulation” to heart. Earlier this month, the fintech company announced that it would start reporting customer purchases to credit reporting agencies.
As traditional players enter the space, some argue that unregulated BNPL providers are not required to adhere to the same strict consumer protection laws as banks. Anthony Stephen, managing director of Barclays Partner Finance, said it was “not a level playing field”.
He adds, “All loans should be reported to credit reference agencies at the point of purchase, so other lenders can get an accurate picture of the customer’s monthly credit commitments.”
According to the FCA, most BNPL providers perform a very basic credit assessment which focuses on risk as opposed to what is affordable to the consumer. Stephen, however, is not optimistic that the regulations will even out, potentially putting high street lenders at a disadvantage.
“The key issue is that the government can potentially apply a different level of regulation to short-term, low-interest products than it does to more traditional offerings, such as credit cards,” he said. he declared. “It will create an unnecessary two-tier regulatory framework that works against the interests of consumers.”