The Buy Now Pay Later sector has exploded onto the lending scene in recent years, but with its practices underregulated, companies will struggle to attract public investment unless they begin treating customers more fairly and offering appropriate products, according to Aegon Asset Management.
Robin Honeyman, responsible investment associate at Aegon AM says that before any BNPL firm can even consider turning to public markets for growth, they need to consider the regulatory responsibilities of mainstream consumer lending.
Honeyman says the sector is seriously under-regulated leaving significant room for financial harm toward consumers. This in turn is a core ESG consideration that would put many financial institutions off investing.
“The growth of online shopping over the pandemic has resulted in the proliferation of Buy Now, Pay Later services (BNPL) which offer consumers the ability to receive goods now and pay for them over a small number of instalments.
“As BNPL operators are quick to point out at the checkout, these loans free consumers from the tyranny of the high-interest rates and fees associated with credit cards and other traditional lending.
“But the checkout is where the problems with BNPL start,” Honeyman says. “With over 17 million users in the UK alone there is huge potential for financial harm in this under-regulated space, and the data to back this up is starting to emerge. According to the FCA’s Woolard Review, BNPL users are often unaware they are even taking out a loan.”
The BNPL sector is easy to use by design, but the deliberate low barrier to access is obfuscating the nature of the credit agreement consumers are entering into, according to Honeyman.
“At checkout BNPL is often presented as just another button, with little to indicate that it is in fact the start of a credit application. As such, users often do not give it the full attention they would give any other loan application.
“This is by design. To increase uptake, BNPL application processes are designed to be quick and easy. This is achieved using soft credit checks to assess a customer’s ability to repay their loan rather than more in-depth hard checks. In addition, important information about the consequences of missing a payment is not always clear in the Terms & Conditions.
“There is evidence that the checks on the ability to repay are not working. In the UK, 56% of BNPL users who had missed a payment also had credit card applications rejected in the previous 12 months. In the US, around 56% of BNPL users were behind on repayments in 2021.
“Users are often not in strong financial situations to begin with, indeed Citizens Advice found that 42% of BNPL users repay their loans with traditional forms of debt, such as credit cards. In the world of consumer lending this is playing with fire.”
Honeyman adds that clear regulatory frameworks exist to protect consumers, but BNPL is “running afoul” of the principles of this framework, increasing the chances of financial harm and bordering on predatory behaviours.
“Core to any financial regulatory framework are the principles of consumer protection – treating customers fairly and offering appropriate products. BNPL operators, by obscuring what customers are signing up for, could be seen to be potentially running afoul of these principles and could increase the chances of financial harm.
“With vital information often unclear it also is attracting the attention of regulators. In the UK, BNPL operators will need to be approved by the FCA from mid-2023, with it there will be requirements to make advertising clearer and not misleading, and affordability assessment requirements will be increased.”
This, he believes, will limit the opportunities of any BNPL firm looking to list publicly as the ESG considerations of most major financial institutions will turn them away from investments in the sector without fundamental reform.
“Players in the BNPL space must get ahead of the inevitable regulatory oversight if they want to do the right thing by their customers and, more cynically, present an attractive proposition when they access the public markets. Any hint of consumer harm will be a big red flag in the ESG assessments of sophisticated investors.”
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