{"id":3493,"date":"2021-10-25T16:14:48","date_gmt":"2021-10-25T14:14:48","guid":{"rendered":"https:\/\/bernstein-group.com\/?p=3493"},"modified":"2022-03-10T14:51:51","modified_gmt":"2022-03-10T13:51:51","slug":"eu-regulators-zoom-in-on-buy-now-pay-later-boom","status":"publish","type":"post","link":"https:\/\/bernstein-group.com\/en\/2021\/10\/25\/eu-regulators-zoom-in-on-buy-now-pay-later-boom\/","title":{"rendered":"EU Regulators Zoom in on Buy Now, Pay Later Boom"},"content":{"rendered":"

Buy now, pay later (BNPL) is booming. Best known in Europe is Klarna with 90 million active consumers, shopping at 250,000 merchants in 17 countries, processing 2 million transactions a day. Klarna\u2019s<\/a> one-click payment services and instalment plans have benefitted from technological innovation, changing customer behaviour and the pandemic, acting as a catalyst for online shopping and digital payments around the globe. The stupendous growth and success have made Klarna Europe\u2019s most valuable fintech at a valuation of $45.6 billion. Other notable BNPL companies include Affirm<\/a> or Afterpay<\/a>, with PayPal<\/a> entering the market by acquiring Japanese Paidy<\/a>.<\/p>\n

Buy now, pay later services are growing at a rate of 39 percent per year and expected to exceed $260 billion by 2025, arguably turning \u201cconsumer finance on its head<\/a>\u201d.<\/p>\n

Buy now pay later schemes do exactly what it says \u2013 online shoppers can buy what they need or crave for without having to pay for it until a later date. While offers and business models vary slightly, payment is usually made through regular interest-free instalments or after an interest-free deferral period. Purchases at relatively small amounts such as for fashion items, are usually paid back within a few weeks. BNPL payments methods have particularly gained popularity among young and new-to-credit customers, such as millennials and Gen Z consumers who lack credit history and whose disposable income is smaller.<\/p>\n

In a recent report<\/a> McKinsey<\/a> has compiled metrics to demonstrate why BNPL is becoming such an attractive business model.<\/p>\n\"\"\n

While ever more consumers embrace BNPL\u2019s undisputed convenience, and retailers benefit from higher conversion rates, it has also caused uneasiness in terms of consumer protection and called regulators to action. With steep costs of late or missed payments alongside a general concern regarding increasing over-indebtedness in times of financial uncertainty, BNPL is suspected of effectively normalising overspending by consumers who may not be able to afford it.<\/p>\n

The focus of the regulators across the globe, and in particular the UK and the EU, has been drawn to BNPL, as \u201cone common feature of BNPL products is that they typically avoid the level of regulation applied to traditional consumer lending, and appear to be specifically designed to achieve this\u201d, as Fitch Ratings<\/a> has recently put it.<\/p>\n

Consumer credit regulations indeed provide exemptions enabling such avoidance strategies to be put in place. These \u2018loopholes\u2019 usually revolve around the amount of credit, with smaller tickets not being caught by otherwise stringent obligations, the duration of the credit, with shorter periods not covered and the costs, i.e. the interest rates charged, which at initially zero help escape the regulatory framework.<\/p>\n

But regulators are now zooming in and taking action. In the United Kingdom<\/strong>, the government earlier this year announced its intention to bring unregulated interest-free BNPL products into regulation given the potential risk of consumer detriment. On 21 October 2021 a consultation<\/a> has been launched, setting out potential policy options to achieve regulation of BNPL. The consumer detriment is characterised by the UK government as comprising of<\/p>\n