Buy Now Pay Later: Where Are We Now?

It's interesting times in the buy now pay later arena. Apple's announcement this week of the launch of Apple Pay Later in the US indicates that major new entrants to the buy now pay later space are undeterred by the prospect of higher interest rates driving up operating costs, an economic environment likely to increase defaults and bad debts, and the expectation of tighter regulation.

While the buy now pay later market develops at speed, almost 18 months on from the 'urgent' need for reform called for in the Woolard Review (which we discussed here), the regulatory position seems rather stuck in neutral. The Treasury's consultation closed early this year yet last month's Financial Initiatives Grid (FIG), which sets out the FCA's planned regulatory initiatives for the next 24 months, states that secondary legislation to bring currently unregulated buy now pay later products within the regulatory perimeter will not be laid until 2023, with the FCA to run a consultation on the proposed rules and details of the regime after that (indicated in the FIG at between April and September 2023). Unless these timescales are shortened it is likely the new regulatory framework for buy now pay later products will not be in force until 2024, three years after the Woolard Review called for urgent action.

The reforms are expected to bring within FCA regulation the financial promotions, pre-contractual explanations and agreements for buy now pay later products and to require creditworthiness (including credit risk and affordability) assessments to be carried out.

The delay to new regulation has not stopped the FCA from taking buy now pay later firms to task and requiring a higher standards in product terms. Despite not being able to regulate firms offering the types of buy now pay later products consumers are offered at online checkout, the FCA has proactively used its powers under the Consumer Rights Act 2015 to assess the fairness and transparency of the buy now pay later products terms of four firms and brought about changes to those terms which made them fairer and easier for consumers to understand.

Similarly, certain firms offering buy now pay later products have adopted practices in anticipation of expected regulatory changes. Klarna, for example, announced that from 1 June 2022 it will begin sharing buy now pay later purchases made in the UK with the credit reference agencies Experian and TransUnion. Others may follow suit.

So, while the machinery needed to introduce regulatory change for buy now pay later products shuffles along, the buy now pay later market moves swiftly on. The effect of cost of living and other economic pressures, and the strategic moves of major new entrants such as Apple (which has yet to confirm whether or not it will enter the UK buy now pay later market) will continue to play out in this space while the cogs of regulatory reform turn slowly in the background. By the time regulation comes in the buy now pay later market could be different from the pre-Woolard Review days not only in size and composition but also in firms' behaviours and practices adopted in anticipation of regulation that for years sat on the horizon.

If you would like to discuss any aspect of this article further please contact Bruce Stephen or Lindsay Lee.