The regulatory crackdown on BNPL firms to affect their path to profits

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The buy now pay later industry has been one of the fastest-growing sectors in the consumer finance market. With buy now pay later (BNPL) providers offering credit at zero interest, an increasing number of consumers have turned to BNPL products to fund their purchases, both online and offline. Notably, the less stringent credit checks by BNPL firms, when compared to traditional credit card firms, has assisted the popularity of BNPL products among consumers globally. 

While this has boosted credit access among unbanked and underbanked consumers worldwide, it has also resulted in higher delinquencies and debt traps for consumers, as they continued to borrow more than what they can afford. This attribute of BNPL firms has attracted the eyes of regulators globally over the last two years, which has resulted in many authorities conducting investigations into the operations and credit process followed by BNPL players. In 2022, central banks and regulatory watchdogs globally have introduced several regulatory measures for BNPL firms to better protect consumers. For instance, 

• In June 2022, the United Kingdom government announced that it is in the process of applying stringent regulations to the BNPL industry. These regulations are expected to promote transparency, fairness, and guided industry development. The regulations, expected to come into force in 2024, will require any lender offering BNPL services to get approval from the Financial Conduct Authority in the United Kingdom. Furthermore, BNPL firms will also be required to conduct frequent affordability checks to determine whether or not the consumers can afford the loans provided to them. Moreover, firms – advertising their BNPL product – will have to ensure that the advertisements are fair, clear, and not misleading. 

The regulatory announcement from the United Kingdom government also provides more options to consumers who feel they are getting abused by BNPL providers. Notably, the Financial Ombudsman Service will accept BNPL-related complaints directly from consumers. Along with BNPL providers, these regulations will be applicable to all businesses offering credit services to consumers in partnership with third-party lenders. 

• In the United States, the Consumer Financial Protection Bureau (CFPB) announced its plans to regulate BNPL firms similar to credit card issuers in September 2022. Notably, the CFPB released an 80-page report outlining the various risks involved with the payment method. For instance,

In the course of its investigation into popular BNPL firms such as Afterpay, Affirm, Klarna, PayPal, and Zip, CFPB found that these firms are approving more loans for consumers. The percentage increased from 69% in 2020 to 73% in 2021, which has subsequently boosted the delinquencies. The report also revealed that 10.5% of the consumers were charged with late fees in 2021 compared to 7.8% in 2020. CFPB also stated that these firms are also not offering standard protections which are found elsewhere.  

In India, the Reserve Bank of India has been consistently issuing new notifications and circulars over the last few months, affecting many of the BNPL firms operating in the country. For instance, 

• In June 2022, the Reserve Bank of India (RBI) issued a circular that barred firms from loading PPIs such as mobile wallets and prepaid cards using credit lines issued by banks and non-banking financial corporations (NBFCs). This circular meant that banks and NBFCs were no longer able to provide credit lines to fintech firms, such as BNPL providers, to load the prepaid instruments. As a result of which, several BNPL players, including Uni and Slice, stopped issuing new BNPL cards to consumers. 

For BNPL firms in India, including those that are card-based, the next step was turning consumers to personal loans which usually carry higher interest rates and have greater principal amounts. 

• In September 2022, RBI issued another notification that effectively banned First Loss Default Guarantee (FLDG). Notably, FLDG is the agreement between fintech firms and lenders, where the firms compensate lenders when a borrower defaults. The ban of FLDG means that the interest rates for consumers will increase because without FLDG, the arrangement between fintech firms and lenders becomes riskier. As a result, lenders will pass on the high risk, in the form of high-interest rates, to fintech firms. On the other hand, fintech firms will pass on the risk to consumers, thereby resulting in higher interest rates for them. 

With the BNPL business model originally thriving on the fact that it was a zero-interest offering for consumers, higher interest rates on the payment method will mean that consumers will turn away from the credit solution. As a result, customer acquisition for BNPL firms might slow down going forward, thereby affecting their path to profitability. 

This regulatory push by central banks and regulatory watchdogs worldwide is expected to hurt the customer experience with the BNPL payment method. The growing transparency in the sector would mean that more consumers would turn away from the payment solution. However, at the same time, it can also lead to higher trust among consumers, thereby resulting in greater traffic for BNPL providers. While regulations can help the BNPL industry achieve more robust growth in the long term, these regulatory crackdowns on BNPL firms mean that providers will find it difficult to achieve profitability from the short to medium-term perspective. 

To know more and gain a deeper understanding of the global BNPL market, click here.