In February 2023, the UK government released draft legislation to crack down on the previously unregulated Buy Now Pay Later (BNPL) lending sector. This sector took off as the pandemic changed consumer behavior drastically, significantly increasing the proportion of sales made online. BNPL introduced a form of unsecured lending directly at the point of purchase online - it’s a form of lending which didn’t exist until a few years ago. According to a recent Office for National Statistics report, May 2022 saw seasonally adjusted internet sales account for 26.6% of all official retail sales in the UK, compared with 19.7% in February 2020. Today millions of UK consumers choose to split payments for items into monthly installments. Companies such as Klarna and Zilch have benefitted from this trend.
BNPL companies operate in a regulatory grey area due to an exemption meant to cover short-term invoice deferral. This means that BNPL firms do not have to be authorized by the Financial Conduct Authority (FCA) as a consumer credit provider or comply with the Consumer Credit Act 1974 (CCA). This has given BNPL companies the ability to offer consumers much more flexibility in how they make payments, paying in discrete installments rather than one lump sum. It has been a popular form of credit - and it’s ever-present, available online and at the tap of a finger when online purchases are made.
However, research by parliamentary committees has found that the lack of regulation has led in some cases to mis-marketing and a rapid increase of consumer debt. It’s why the government has proposed draft legislation which means BNPL companies will be brought under FCA supervision, and will need to comply with its regulations, such as the upcoming Consumer Duty and rules on affordability checks. Consumers would also be able to complain to the Financial Ombudsman.
Other countries are scrutinizing BNPL products and are working to provide consumers with more protection when using BNPL as a form of unsecured lending. The United States is one of them. A September 2022 report by the Consumer Finance Protection Bureau concluded that BNPL companies “are not providing the same rights and protections… that credit card companies provide.” While increased scrutiny of BNPL in Australia means that these products are set to be regulated by the country’s Treasury.
Consumers are protected by Fintechs too
It’s not just governments who are taking steps to protect consumers. The Fintech industry itself is working to ensure that BNPL is safer for consumers and lendtechs.
A report by open banking platform Tink who, like Currencycloud, were acquired by Visa in 2021, discusses how open banking can be a great tool for lendtech companies wanting to improve affordability checks. “Traditional methods for underwriting are time-consuming and often based on outdated financial records, which has a negative impact on both your business and your potential customers.” The report goes on to say that the use of Tink’s Income Check and Expense Check tools can give lenders a more accurate picture of a customer’s financial situation, leading to a faster underwriting process and an improved customer experience.
Currencycloud’s regulation team has also been busy ensuring we are fully compliant with Consumer Duty Regulation. This is vital, as we support some of the biggest Fintechs like Revolut, Monese, Seedrs and Starling Bank, helping them process millions of consumer transactions a day. Eliska Jelinkova, Regulatory Manager at Currencycloud notes: “the new Consumer Duty is all about putting customers’ needs first. It has given the team at Currencycloud the opportunity to take a look at our current offering and ask ourselves how we can make our activities even more customer-centric, and drive a real change in the payments industry.”
Currencycloud, supporting lenders the world over
Currencycloud is regulated as an electronic money institution (EMI) in the UK, EU, US, Australia and Canada, and we are steadily growing our base in APAC, meaning we can provide regulatory cover for our existing clients there as we are in step with government regulatory policies as they change.
Fintechs don’t just need to be on top of the new BNPL regulations, they need to be compliant with payments regulations across all jurisdictions. The UK, EU, US, Canada and Australia all have different requirements, and all must be complied with.
See how we can help you access new jurisdictions, with the regulations you need to get ahead when lending by talking to one of our payment experts.