BNPL – Global Regulation Net is Closing

UK Regulation will allow the first glimpse at BNPL business practices.

Prepare to be shocked at how cavalier these apps really are. 

The UK financial regulator and treasury announced regulation of all BNPL apps on February 3rd.

This significant change will impact: Klarna, Afterpay Australia which operates under the Clearpay brand (we all know why that is), Zip, Splitit, OpenPay, LayBuy, Zilch, PayPal and others.

Regulation will basically upend the entire business process and many pieces will need to be changed, some significantly.

The EU is also looking at BNPL apps as are Canada - USA will no doubt follow given political changes in Washington.

Yet after 7 years Australia and New Zealand have no BNPL laws and no regulation â€“ it’s a wild west of consumer lending.

It’s not just credit checks on new accounts - its full disclosure of all activity to bureaus and full disclosure of all account closures, apply hardships rules, full KYC, full AML, be fully accountable to a regulator, accountable for customer complaints with ombudsman, comply with bad debt and agents behaviour, late fees will have to reduce to acceptable APRs currently between 46-68% - also subject to annual review by FCA as a starting point.

It is also very likely the 30% bad debts to revenue percentage will be a major issue - it goes directly to the hardship and overspending issues.

BNPL OVERVIEW

How BNPL operate - $100 purchase earn $4 in revenue other key revenue source are late fees.

Many BNPL also offer lines of credit and fixed instalment loans – yet all of the players are unregulated. Since when is offering up to $20,000 credit line not lending?

Consumer buys $100 purchase – in most cases prepayment of $25 is required (others its $100 loan) – then 3 installments of $25 over 6 weeks.  

BUSINESS MODEL

-Consumers used as "off balance sheet" securitized borrowings

- Very High Bad debts avg 30% of revenue

- Very high ‘late fees’ when converted to APR’s of up to 68%

-Small 'loan' amounts over a short period

-BNPL typically don't assess consumers ability to repay

-Majority do not use credit bureau for new applications or update performance

-Majority do not report payment obligations or default to credit bureaus

For BNPL - $100 purchase, the max loan is $75 (3 payments) in most markets. If someone makes 2 payments and misses the third $25/$75 loan but $25/$100 GMV – which is totally misleading

BNPL AUSTRALIA/NZ EXPLOITING A LEGAL LOOP HOLE

BNPLs exploit a current loophole in the Credit Acts in Australia and New Zealand.

The Australian National Consumer Credit Protection Act 2009 (NCC) - The NCC does not apply to certain loans, including: low-cost short-term credit (less than 62 days), insurance premiums paid by instalments, bill facilities and staff loans. When does up to 61 days allow a loan to be unregulated? No other OECD country has any legislation like this – it’s totally crazy yet regulators don’t care.

The two regulators reasonable are Reserve Bank of Australia (RBA) and Australian Securities & Investment Commission (ASIC).

AUSTRALIAN REGULATORS TAKE NO ACTION

ASIC has failed to close this loophole – despite its own research since 2018 showing considerable damage done to young mostly female consumers. ASIC research shows 60% BNPL users are 18 -34, a majority are young women. 44% of users earn less $40,000 - of this group 40% students are part time workers, this sounds more like pay day lenders than ‘innovative’ Fintech.

The RBA has not moved on the key issue of allowing retailers to surcharging – stating BNPL is currently too small to ‘designate’

In one of the most astonishing statements ever made by a payment regulator RBAs Governor said:

“Dr Lowe said the stance was in recognition of the innovation the instalment products brings to customers and the relatively small overall volume transacted compared to existing payment methods”  AFR Dec 7th Afterpay Benefits Outweigh Harm :RBA.

So…. BNPL is too small to regulate – really!! 

So why is the sector worth US$35.5 billion on the Australian stock market? 

BNPL sales in Australia sales A$9 billion or 5% of receivables

BNPL sales in the UK GBP 2.7 billion (A$4.6 b) or 1% of receivables (not sales that’s 2 bsp)

BNPL: Struggling to Pay with Limited Regulatory Protection

Brian Riley, Director, Credit Advisory Service at Mercator Advisory Group

The question of the day is, “Will BNPL begin to fizzle without regulatory guardrails, and will Merchants and consumers ultimately reject loose lending?

Like it or not, creditors are responsible for keeping their consumers out of trouble by ensuring the consumer can repay their debt. In the United States, the Card Act of 2009 covers this in Â§ 1026.51(a):

 Consideration of ability to pay. 

 A card issuer must not open a credit card account for a consumer under an open-end (not home-secured) consumer credit plan, or increase any credit limit applicable to such account, unless the card issuer considers the consumer’s ability to make the required minimum periodic payments under the terms of the account based on the consumer’s income or assets and the consumer’s current obligations.

In short, creditors need to ensure the consumer can pay the loan terms based on their current financial situation. That is good for the lender and good for the consumer—neither party benefits when the loan starts with a limited ability to repay.

The U.S. is not alone in this requirement. In the UK, for example, lender responsibilities are just as clearly laid out in this document by the Financial Conduct Authority, titled “Preventing Financial Distress by Predicting Unaffordable Consumer Credit Agreements: An Applied Framework.”

 The problem is that although regulated financial institutions have precise requirements, many fintechs are not covered because they are outside the regulatory boundaries. 

This brings us to today’s read from Yahoo. Where a personal finance correspondent talks about “A Fifth of Buy Now, Pay Later Users Struggling to Repay Christmas Spending.” The short story is that unqualified consumers get quickly over their heads when lenders fail to govern the ability to repay. According to the referenced survey:

§ More than two-fifths (44%) of UK adults who used a BNPL scheme to fund their Christmas shopping are now concerned about their ability to repay, the research found. 

§ A fifth (20%) of shoppers who used buy now, pay later (BNPL) schemes over Christmas will be unable to meet their repayments without borrowing more money, a survey suggests.

§ Concerns have been mounting about some consumers taking on unsustainable debts. But it has also been argued that, when used responsibly, such schemes can help prevent people from turning to higher-cost forms of credit to finance purchases. 

§ However, the findings also suggest that schemes may encourage unnecessary spending, as nearly a third (32%) felt it made them spend more than they usually would, and more than two-fifths (44%) bought more extravagant gifts. 

No one wants to be a grinch, but it is important to protect people from themselves given current economic times.

We’ve previously mentioned that BNPL is a worthwhile, recently defined lending form, but it requires regulatory direction. Regulations ensure business continuity and protect consumers. Ability to Repay is only one of several essential consumer protections. Another is in return policies and disclosures. As an example, Regulation Z, also known as Truth in Lending, protects consumers; Experian puts it well in their summary: “Regulation Z is a federal law that standardizes how lenders convey the cost of borrowing to consumers. It also restricts certain lending practices and protects consumers from misleading lending practices.”

Consider refund policies on electronic commerce. Reg Z provides specific consumer rights to ensure quality, accuracy, and consumer satisfaction. A similar approach in the UK is the Consumer Rights Act of 2015.

Which? A UK consumer-focused journal, published a study on the unevenness of consumer protections. A concern is that while BNPL pushes into smaller businesses, that return policy may not be as good as top retailers. 

§ The new breed of BNPL schemes is fast and easy to sign up to when shopping online, allowing you to borrow within a few clicks and without hard credit-checks. But, if you’re thinking of using one to pay for something online, it’s important to check the retailer’s T&Cs before placing an order.

§ But our research found more than 170 online retailers, listed on at least one of the BNPL firms’ apps or websites, whose returns and faulty goods policies are incorrect or unclear.

§ This policy is contrary to the Consumer Contracts Regulations, giving you rights to cancel most online orders for goods from the moment they are placed, up until 14 days of receiving the goods. ‘It surprises me that Laybuy doesn’t carry out all the relevant checks,’ the customer told us. ‘I would never have found this company if they weren’t on the Laybuy seller page.’

Here is the key:

§ Of the retailers, we found issues with: 95 don’t offer refunds on sale items 74 don’t give customers the minimum length of time to return orders 36 do not adhere to rules on returning faulty goods 17 don’t offer refunds at all 16 charge fees for making returns The Consumer Contracts Regulations gives you rights to return items when shopping online. There are some circumstances where the Consumer Contracts Regulations won’t give you a right to cancel. These include perishable items, tailor-made or personalized items, and goods with a seal for hygiene reasons. For most items, though, you have a minimum of 14 days after receiving an order to notify a retailer that you’d like to make a return and a further 14 days after this to send the items back.

The challenge is simple. Fintechs certainly have a right to bring new products to market. In the case of BNPL, the product can be a winner. But, consumers need boundaries that ensure what they buy can be paid. They also need clarity and protection from shoddy goods. Merchants must-see BNPL as another payment option and be confident that they will not lose a future sale due to dissatisfaction. For growing BNPL firms, the last thing you want to known as is a sloppy lender.