Time’s up for lobbyists trying to slim down progressive new rules for Buy-Now-Pay-Later (BNPL). Last night, a consultation by HM Treasury on new regulations for BNPL lending came to a close. Whatever happens, ministers must keep momentum and not water down the legislation.
It’s vital that the government does everything it can to make sure consumers are properly protected. Vital because we are seeing the largest change in how people pay in decades and because, until now, too many lenders have done their business, lending billions in credit to the public, without the high standards, accountability and consumer protections expected of regulated firms.
BNPL services have become so integral to how consumers spend that BNPL accounted for almost one pound in every eight spent online this January. Like consumers’ habits, the British economy has changed. Inflation is down slightly, but cost-of-living pressures remain intense. For some, access to interest-free, affordable credit is the only way to manage spending from month to month. Why would you opt for an interest-bearing revolving line in its place?
Rising demand for 0%-interest credit has led to a growing number of fintech companies offering these services. In a mark of validation, many high-street banks have entered this new space too and more recently, Apple. Yet, until now, regulation has been busy playing catch up.
In fact, the majority of firms have been operating solely under an exemption to the UK’s existing consumer credit regulations. That has meant unregulated BNPL businesses have operated without accountability, while processing short-term loans running into the billions. This left consumers without a right of appeal or redress if things went wrong.
Thankfully, that situation is about to change. In February, the UK Government set out proposals to tighten regulation of the BNPL sector, clamping down on unregulated providers. To date, most firms have paid lip service to the idea of greater oversight and control without taking action. Now, the customer safeguards they could – and should – have introduced voluntarily will become mandatory.
We support the government’s plans – and would go further still. There are two areas where we believe the incoming regulations should be tightened for the whole credit industry, not only the BNPL sector.
The first relates to what is called ‘credit stacking’. This is where customers are allowed to pay off one debt with another form of debt, such as using a high-interest-bearing credit card to pay off an interest-free instalment plan with a BNPL provider. All this does is shift the debt around, often moving it to a card carrying a significantly higher interest rate than would be imposed by an interest-free BNPL agreement. The BNPL provider is handing off the risk to the credit card company and the customer is being “refinanced” out of a zero-interest loan into an interest bearing one.
This short-sighted practice should be banned outright. It allows the new providers to underprice risk and offload defaults to credit card companies, leaving them with higher bad debt losses, and transforms interest-free credit into revolving interest-bearing credit for customers. This all perpetuates problem debt.
The second area relates to how customers’ borrowing and performance is communicated to credit reference agencies (CRAs). The government would like BNPL providers to report to these organisations, which until recently haven’t been ready for accurate reporting on the sector. Fortunately, as of this year the major UK agencies are ready and so all credit lenders, inclusive of BNPL, should now share data with all prime CRAs – as Zilch already does.
In short, it is our belief that all credit lenders – BNPL or otherwise – should report to all credit referencing agencies, and this should be reflected in consumers’ scores today. Doing this would offer the highest form protection to consumers.
When that’s done correctly the ecosystem will surely begin to sing. It will allow all lenders full visibility of individuals’ outstanding debt and repayments, helping lenders to better assess affordability, further protecting customers from over-borrowing. So far many BNPL firms have been unwilling to report at all, or to all three major credit reference agencies. Of those that do, most don’t do so in a way that 1) ensures repayment performance is reported every month, and 2) influences their customers’ credit scores. This is something we at Zilch already announced in January 2023.
If properly operated by responsible, regulated companies, BNPL can deliver real benefits. We’re not reinventing the wheel but rather making the wheel more accessible, affordable and easier to understand (most today don’t even know what APR stands for). These services are significantly more affordable than how we all used to borrow money for short periods – those expensive credit cards or online loans, for which the average APR is now over 30%.
With 5 million UK consumers deemed ‘credit invisible’, we need an industry standard for credit reference agency reporting that incentivises and rewards responsible spending, while making sure that BNPL providers conduct appropriate affordability checks on borrowers and help other lenders do the same.
History has taught us technology always arrives before regulation. The UK can safeguard people and build a system of regulation that serves as a blueprint for regulators and governments globally. It seems that we are well on our way to doing just that.