Coadec sets out vision for BNPL regulation
As the Financial Conduct Authority gears up for a consultation on regulating the buy now, pay later market, the Coalition for a Digital Economy (Coadec) has set out its proposal for a “robust and proportionate” framework.
The BNPL industry has seen huge growth in recent years, with the likes of Klarna and Affirm becoming multi-billion dollar giants, while banks and Big Tech are also increasingly getting in on the action.
The trend has accelerated during the Covid-19 pandemic. According to Coadec – an advocacy group for Britain’s technology-led startups and scaleups – in 2020 over 10 million Brits used BNPL to purchase goods online, accounting for nearly four per cent of online retail sales.
Earlier this year, the FCA signalled its intention to introduce new rules for BNPL firms amid mounting fears of a growing debt burden for cash-strapped shoppers.
In February, Christopher Woolard, who is chairing a review into the unsecured credit market at the FCA, said: “Changes are urgently needed: to bring BNPL into regulation to protect consumers; to ensure that there is secure provision of debt advice to help all those who may need it; and to maintain a sustained regulatory response to the pandemic.”
However, many in the industry argue that BNPL has developed an unearned negative reputation. Coadec points to figures from Capital Economics that show that using BNPL avoided £76 million in interest fees from credit cards in 2020. Meanwhile, industry numbers suggest default rates ranging from one per cent to five per cent, compared to 6.4% defaults on credit card payments.
As it tries to shape the debate ahead of the upcoming consultation, Coadec has published its own report, arguing that regulation should focus on five themes:
- Providers, not retailers, should be the focus of regulation
- Providers should be required to develop processes that track affordability
- Drag the credit rating industry into the 21st Century by using Smart Data regulation to get access to the credit ratings agencies’ treasure trove of data that should actually belong to the customer
- Tighten consumer communications
- Provide a better customer redress model
Charlie Mercer, head, economic policy, Coadec, says: “This report injects some sense into the debate around BNPL. All too often BNPL is discussed in the press without regard for the realities of user experience, default rates, best practice, and the risk involved. This means that the very real issues with the status quo could be missed.
“While the Woolard Review was a welcome catalyst for change, the answer does not lie with stunting innovation and over-prescription. Instead, regulation should be proportionate and focused on consumer outcomes: this report offers a vision of what this could look like. Getting this wrong now could lead to impairing or even killing off innovation in the consumer credit market.”