As rising inflation and energy costs begin to bite, more consistent regulation of the ‘buy now, pay later’ market will protect consumers from spiralling debt, writes Antony Stephen, CEO of Barclays Partner Finance.

Just as the UK seems to be finally consigning pandemic-related restrictions to the past, new fiscal challenges are emerging in the shape of inflation increases and soaring energy bills. 

For consumers, especially those in financially vulnerable groups, these developments make it much harder to stay on top of spending – when the cost of essential items such as heating rise substantially, household budgets are stretched to breaking point.

In these circumstances, the financial services industry, and the bodies that govern it, have a duty to support the public to stay within their means. And for that to happen, we need a regulatory framework that is consistent and fit-for-purpose.

Most financial products in the UK – especially those that involve lending money to consumers – are subject to the same checks and balances. However, as things stand, many ‘buy now, pay later’ (BNPL) services are not.

This is a problem because, in some cases, BNPL products enable consumers to accrue debt they can’t repay. In fact, research from Barclays Partner Finance found that 27 per cent of Brits are using BNPL and, of these, over a third (36 per cent) have used it to spend more than they can realistically afford. Just as concerning is the fact that 11 per cent of people believe missing a BNPL repayment won’t affect their credit score, when the reverse is true. 

Too often, the ease of accessing BNPL finance is prioritised over the long-term customer outcome, and this is counter-productive. With many of the newer products on the market, no hard credit checks take place, and little information is provided to the consumer before they confirm their choice. It’s not a surprise, perhaps, that only three in five (61 per cent) shoppers say they truly understand how the BNPL model works. The lack of hard credit checks also means that customers may be given credit irresponsibly –10 per cent of BNPL users admit they opted for BNPL because their applications for a traditional credit card had been rejected.

Another issue is the fact that many unregulated providers don’t currently report lending to the credit reference agencies at the point of purchase. This creates a lack of transparency, and makes it hard for other lenders to get an accurate picture of a customer’s existing credit commitments. Without this transparency, it’s easy to see how a customer may be offered multiple loans by different BNPL providers, with each lender unaware of the customer’s mounting monthly repayments. Our research shows that the average BNPL user is currently paying off £293 in BNPL loans, and almost half (47 per cent) have had loans from different BNPL providers at the same time.

Encouragingly, the government is making moves to better regulate the market, and a consultation is taking place to help shape what that will look like. The early indications, though, are that regulation may unfold in a way that doesn’t give consumers the best protection.

The key issue is that the government will potentially apply a different level of regulation to short-term, low-interest products than it does to more traditional offerings such as credit cards. In our opinion, this will create an unnecessary two-tier regulatory framework that goes against the consumer interest. Some products will be bound by Consumer Credit Association and Financial Conduct Authority rules, and some won’t. It makes no sense, and incentivises lenders to adapt their business models to meet the lower regulatory threshold, putting more consumers at risk. 

Proponents of this two-tier system argue that, because the BNPL model is non-interest bearing, it is lower risk and does not need to be as tightly governed. If anything, the Woolard Review published last year shows that the frictionless nature of BNPL lending carries very serious risks. With finance available in just a few clicks, very few controls on how products are marketed, and Credit Reference Agencies having little-to-no visibility of these loans, the likelihood of a consumer getting into unmanageable debt is much greater than it should be.

Another assertion is that the full regulatory framework is too cumbersome for the more modern and agile BNPL providers. This may well be the case, but creating a two-tier structure purely on that basis is not the answer. If the system needs to be reviewed and modernised, that process should be undertaken for the market as a whole, rather than creating special allowances for one particular type of product.

Self-regulation for the BNPL sector has also been mooted, but this has been met with fierce opposition. In January, two leading commentators from Australia, where the BNPL market is more mature than it is in the UK, warned against it. The Consumer Action Law Centre and Financial Counselling Australia said that there are serious flaws in a self-regulation model, while the latter’s CEO – Fiona Guthrie – cautioned that ‘the relationship between BNPL and growing financial hardship is clear’. This is counsel that we should take very seriously in the UK. 

As one of the leading payments providers in Europe, Barclays is not anti-BNPL. Far from it. We have many of our own well-established point-of-sale finance products and have recently extended our relationship with Amazon to provide finance to its UK customers. However, we take a strong view that products which fulfil the same consumer need should be accountable to the same regulation –protective measures such as affordability assessments should be mandatory for all credit providers.

Looking after the most vulnerable members of our society has been a defining part of British culture over the last two years. Now, as the landscape changes, we need to replicate that approach for the financially vulnerable, and appropriate regulation of the BNPL sector is a vital part of doing so.