The BNPL consultation in the UK has now closed. What did it cover, and what does it mean for banks?

BNPL

Bridge2pay will explains – BNPL Consultation-The UK government published a consultation on draft Buy-Now PayLater (BNPL) service law in February 2023, outlining the proposed legislation’s scope as well as specific exclusions.

The new regulation intends to provide customers the choice to spread out the expense of their purchases over a longer period of time without putting them in insurmountable debt.  This is a significant accomplishment in the midst of the rising expense of living in this era of high inflation and interest rates.

The most recent consultation on draft legislation implies that regulation will be restricted to fix-sum loans and interest-free repayable instalments offered by third-party lenders, building on the Woolard Review in 2021 and the accompanying consultation response in June 2022. Its earlier stance has changed, and as a result, agreements supplied directly by merchants would no longer be covered, whether they were conducted online or off-site. Currently, trade credit is also excluded from this rule.

Additionally, it specified that individuals covered would be subject to regulations, such as clauses governing financial promotions, creditworthiness evaluations, and pre-contractual conditions.

In recent years, “Buy Now, Pay Later” (BNP-L) services have taken the world of retail by storm. These platforms offer consumers the convenience of making purchases and deferring payment, often interest-free, over a series of instalments. While BNPL services can be a game-changer for shoppers, they also carry potential risks. This is where BNPL consultation comes into play.

  • Understanding BNPL: BNPL services allow consumers to make purchases and spread the cost over a few weeks or months. They are often presented as a more flexible and affordable alternative to traditional credit cards. This has made them incredibly popular, especially among younger shoppers.
  • The Importance of BNPL Consultation: BNPL may seem like a fantastic solution, but it’s not without its complexities. For consumers, it’s crucial to understand the terms and conditions, potential late fees, and the impact on credit scores. For businesses, integrating BNPL services effectively can be a challenge.
  • Consumer Perspective: BNPL consultation can help consumers make informed decisions. It guides them on how to choose the right BNP-L service and how to manage their payments to avoid unnecessary fees. This is especially important for young adults who may not have extensive experience with credit and finance.
  • Business Perspective: From a business standpoint, BNP-L consultation is essential to navigate the evolving retail landscape. It involves understanding the integration of BNP-L services into an existing payment system, compliance with regulations, and managing potential risks associated with delayed payments and customer disputes.

The legislation, as it stands, wants to make sure that BNP-L providers operate in a fair and transparent manner. It is anticipated in the second part of the year. Here are some of the important factors you should pay particular attention to: affordability checks, complaint management, credit reporting, charge rate restrictions, and promotion.

According to the draft legislation as it currently stands:

  • Affordability Checks: Before signing a contract with a customer, BNPL providers ought to be forced to conduct more rigorous affordability assessments. They must determine if the customer can afford the repayments and make sure the deal is appropriate given their financial situation. The FCA is deciding how to adapt the current creditworthiness regulations to BNPL.
  • Complaints Management: According to the draft law, users of BNP-L will be able to raise their concerns about the behaviour of BNP-L providers to the Financial Ombudsman Service (FOS), which will help prevent customers from getting into debt problems.
  • Limits on Charges: Late payment penalties and other costs should be restricted, and precontractual clauses should stipulate clear, upfront disclosures regarding these expenses. As a result, consumers ought to receive greater information about the expenses associated with using BNP-L and shouldn’t face hefty fines.
  • Credit Reporting: The payment history of BNP-L clients should be reported to credit reference companies. Consumers might do this to raise their credit ratings, which are beneficial when making loan or other credit product applications in the future.
  • Regulation of Advertising: It is anticipated that the Financial Conduct Authority (FCA) will have the authority to oversee BNP-L advertising in order to make sure that it is truthful, accurate, and doesn’t mislead customers.
BNPL Consultation

Impact on BNPL providers

The new legislation’s financial burden would probably fall on BNPL providers. The requirement to spend in affordability checks to ensure that their BNPL agreements are compliant would exacerbate the additional operational expenses necessary to allow credit reporting.

In order to combine increased operating expenses with the potential of declining basket sizes as consumers grow more frugal with their spending and hesitant to pass financial checks, providers may also need to reevaluate BNPL offerings. There can be fewer BNP-L alternatives available at the register as a result of suppliers trying to save expenses overall. 

Impact on Banks

Banks can find themselves in a favourable position in the face of legislative change as they will be FCA compliant from the start, even if traditional BNP-L providers will probably need to make major adjustments to line with the future rule.

We have already discussed the advantages of BNPL for banks. Banks are in a unique position to capitalize on their recognized reputation and promote responsible lending products because of their sizable balance sheets and effective checks and balances.

While under 3% of consumers globally use (BNPL) for most of their big-ticket purchases today, an additional one-third said they would be more willing to do so if it were offered by their primary bank.”

– 2022 Accenture Global Consumer Payments Survey

Impact on Consumers

Consumers will be able to assess the whole cost of BNPL with more knowledge thanks to limited fees and restricted ads, which is essential for preventing them from incurring excessive debt and suffering from financial difficulty. The possibility of doing that together with gradually raising credit ratings would be welcomed by consumers.

It is crucial to keep a careful eye on this place as the final regulation draws near in case there are any significant updates to what has been said so far. There is little question that the new reform will result in a more accountable and sustainable BNPL industry; in light of the current economic turmoil, we anticipate that this change will be enthusiastically embraced.

The Future of BNPL Consultation

As BNPL services continue to grow, the need for professional guidance will only increase. Consulting firms and financial advisors specializing in BNPL can assist both consumers and businesses in optimizing their experience with these services.

In conclusion, while BNPL services offer undeniable benefits, they also come with responsibilities and risks. BNPL consultation ensures that consumers make informed choices and that businesses utilize these services effectively and responsibly. As the BNPL industry continues to evolve, consultation will play a critical role in creating a win-win situation for all parties involved.

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