The government has announced a clampdown on buy-now pay-later (BNPL) firms, with new regulation that will bring them under the full remit of the FCA.
This is unlikely to be welcome news for BNPL lenders, as it means they will be subjected to greater scrutiny and are at a heightened risk of being fined or prosecuted for wrongdoing. We know that the FCA has used its prosecution powers in the past, and can do so again – and directors of both, BNPL lenders and those who promote their services, will not want to face the consequences of willingly or negligently failing to comply with the regime, which could involve fines and even prison sentences.
The changes will also leave businesses who use BNPL services wondering how they will be impacted. For many SMEs across the globe, BNPL services have been a real game-changer – from both a B2B and B2C perspective. A key reason for this is that they allow small businesses to reach more customers – in particular, the younger generations who might not have a credit card and are unable to afford a business’s products upfront. But on the flip side, small, in particular retail, start-ups can take out BNPL loans themselves to help them make mass product purchases without using all of their limited cash in one go.
It is easy to see, therefore, how instrumental BNPL can be in aiding the growth of a business but those who use them must practice caution – there is a hefty price to pay for missing or being unable to afford a payment. For consumers, it’s easy for spending to get out of control because late payment schemes create the illusion that they can afford to buy more than they usually would. With recent research showing that 59% of customers make unnecessary purchases through late payment apps which they wouldn’t have otherwise made, it’s easy to see how quickly this can become dangerous. For small businesses who take the loans out themselves, there’s always the risk that the return on a BNPL investment could turn out to be less than expected, with the repayment then being unaffordable which would strangle a new start-up before it gets a chance to get off the ground.
As it stood, BNPL agreements entailed minimal credit checks, and BNPL lenders did not have to provide important information to borrowers which could influence their decisions. That’s why the government has looked to address the issue: because borrowers are being encouraged to take out loans they potentially can’t repay – and to buy products as freely as they usually wouldn’t.
With stricter regulation being introduced, it may make it more difficult for small start-ups who rely on BNPL lenders to buy in bulk as the availability of BNPL lenders, their credit terms and credit sums is likely dwindle. It will also like limit the choice for consumers who may find more stringent affordability checks and higher repayment terms are a trade-off for greater protection. Whilst much has been said about the difficult choices facing BNPL lenders, much so has been of the impact this will have on business sales. SME businesses should be thinking about ways to overcome these issues now – for example, by utilising influencer marketing and offering student discounts to keep the younger generations on side rather than relying on BNPL lenders to influence more sales. It is worth considering this now before the new regulations begin to have an impact, so your business is one step ahead of its competitors.
