Does regulation pose a threat to buy now, pay later market growth?

The BNPL market has seen a financial boon in recent years, creating market leading behemoths like Klarna, Affirm and Afterpay – who are all recording strong growth on the back of clear market demand. Could a growing call for regulation in the sector change this?

Amidst the evident popularity of BNPL offerings, there have been calls for more stringent regulation of companies in the space due to growing concerns by authorities towards consumers who may be drowning in unseen debt.

A study by Credit Karma previously found that 40% of US consumers who used BNPL have missed more than one payment, and 72% of those saw their credit score decline due to the missed payments. In addition, a survey earlier this year found that a fifth (20%) of shoppers who used BNPL schemes last Christmas believe they will be unable to pay the money back without having to borrow more money to do so.

While the selling point of spreading payments out over a time period may seem appealing to some consumers, many financial overseers are beginning to recognise the need to bring in tougher regulation to ensure consumers are protected from financial ruin while also reigning in irresponsibility from companies.

In February of this year, UK financial watchdog the Financial Conduct Authority (FCA) called for the introduction of new regulations to ensure that people using BNPL services do not fall into serious debt.

According to ThisIsMoney in April, plans by the FCA to regulate the sector will be released ‘within weeks’, with a consultation on draft legislation expected to be published in May. The publication claimed regulation would likely cover the marketing and platform ease-of-use and would enable borrowers to complain to the Financial Ombudsman Service as well as providing credit card-style protections applied to checkout credit providers.

Elsewhere, the Monetary Authority of Singapore (MAS) and other government agencies also recently highlighted they were investigating if some form of regulation is necessary for BNPL schemes. MAS was also planning to work with the media to highlight the pitfalls of taking on excessive credit, a common part of a BNPL scheme.

Movers and shakers

These calls for stronger regulation come in tandem with the findings that the BNPL industry is poised for significant growth over the next few years. The use of BNPL products almost quadrupled last year, with the value coming to around £2.7bn and around five million users.

A Bank of America survey in December 2020 predicted that Klarna, Afterpay and Affirm were poised to grow between ten and 15 times by 2025 and eventually process transactions between $650bn and $1trn.

This year has seen both Klarna and Afterpay continue their strides towards market dominance. In January, Afterpay officially began trading on the Nasdaq – seeing its shares hike 100% within the first day. Meanwhile, Klarna became the most valuable privately-owned FinTech in Europe in March following a $1bn funding round that lifted its valuation to $31bn.

PayPal Credit has also entered into the BNPL space, launching its ‘Pay in 4’ service in November 2020. Pay in 4 allows its users to split their purchases – ranging from $30 to $600 – over four interest-free payment instalments.

California-based Sunbit joined Klarna in the unicorn status club recently when its $130m Series D brought the company’s valuation up to $1.3bn. The business claims it markets the only technology that enables approval rates of 90%, with a 30-second approval process aiding financial transactions between $60 and $10,000.

UK-based startup Zilch also recently raised $80m in a Series B funding round that has now valued the company at over $500m. Zilch is the first FCA-regulated BNPL enterprise. New Zealand firm Laybuy also recently closed a A$35m capital raise to further its push into the UK market.

Other big firms making move in the BNPL market are Clearpay, who partnered with payments juggernaut Stripe earlier this year to help the second most valuable FinTech provide flexible payment instalment options to its customers.

Meanwhile, Japanese BNPL Paidy recently completed a $120m Series D funding round, which it aims to use to grow its merchant transactions and develop its new offering called ‘3-Pay’, which allows customers to split charges into three equal, interest-free, monthly instalments.

Australian company Zip also recently expanded into Europe and the Middle with the purchases of BNPL competitors Twisto and Spotii.

Will regulation strangle market growth?

One of the chief worries for many BNPL businesses is whether the regulation of the market could lead to consumers being ‘put off’ using the service, potentially through restrictions on payment flexibility or instalments.

Does this look to be the case? Not quite. A survey of 1,000 BNPL users conducted by Attest earlier this year found that not only would 66% of consumers feel more comfortable using brands that checked affordability, but 49% of them would spend more knowing that affordability had been checked.

Meanwhile, 53% of respondents remarked they would be scared of being rejected if a credit check took place, while, quite worryingly, 37% didn’t think hard enough about affordability before using BNPL, the latter point potentially providing a further argument for regulation.

Attest noted that protection for the consumer if something goes wrong was also found to be an important driver of choice when selecting a specific provider of BNPL services – being rated fourth most important behind ease of use, pricing and availability.

These results underline a clear point that having trust for the BNPL service being used is hugely vital in the long term not just for the company itself but for the industry as a whole.

While increased regulation in the BNPL space may not potentially hinder future growth, such findings from the survey highlight that there is an increasing argument for companies in the market to ensure responsibility for their customers.

Copyright © 2021 FinTech Global

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