Features | 22/07/21


The buy now, pay later (BNPL) sector has been firmly in the spotlight since February this year when the Woolard Review, commissioned by the Financial Conduct Authority (FCA), highlighted the need for increased regulation in this space, to protect consumers from taking on too much debt.

Accelerated growth was propelled by the pandemic and unregulated BNPL nearly quadrupled last year, with five million customers having used this kind of payment since March 2020. TransUnion data shows 37% of UK consumers have used a BNPL product at least once within the last 12 months and the expectation is that growth will continue, with this sector globally anticipated to increase by 10 to 15 times its current size by 2025.

And it’s not confined to the retail industry. Consumers can spread the cost of purchases with interest-free, short-term credit across all manner of goods and services, even for holidays which now offer ‘fly now, pay later’ options.

Credit innovations such as BNPL have proved timely for consumers that have seen their buying power diminished by the pandemic, with TransUnion’s Consumer Pulse study which has been tracking the financial impact of COVID-19 showing that nearly a third (32%) of UK householdsiv are currently negatively impacted.

Buy now, pay later, or deferred payment credit as the FCA is expected to refer to it, spans several different types of products. Some of these do not currently appear on a consumer’s credit report, and no affordability checks are required to take out the finance, which has given rise to concerns that unregulated BNPL threatens to create a new generation of debtors.

The aim of new regulation will be to support finance providers in ensuring payment plans are affordable and sustainable, whilst protecting consumers from the risk of overextending themselves financially.

BNPL providers will have access to shared credit report data when making credit risk and affordability decisions, while non-BNPL lenders will be able to view the full extent of a consumer’s financial exposure, helping to guide more accurate assessments.

The likely regulation would also bring about a route to support consumers with thin credit files in demonstrating their ability to make timely payments. This will be welcome at a time when economic turbulence means access to borrowing may be crucial for some.

While legislation is not yet in place, with the government and FCA still to consult with stakeholders on this topic, BNPL providers have a responsibility to recognise the roadmap of change ahead and prepare accordingly. The Woolard Review urged the FCA to act “without delay” and, as such, providers are expecting change and should be thinking proactively about their role, putting consumer protection firmly at the forefront and looking to adapt their business models and growth strategies as required.

In anticipation of what lies ahead, the Steering Committee on Reciprocity – a cross industry forum made up of representatives from credit industry trade associations, industry bodies and credit reference agencies including TransUnion – has issued new guidance, so that BNPL providers can start to adapt their processes and model the impact of likely changes on both their business practices and consumers’ credit scores.

The type of credit search recorded varies dependent on the product and the stage of the customer journey. If a hard search is carried out when a customer first opens a new account, this will be visible to other lenders and can impact credit scores and credit application decisions. Subsequent soft searches, however, will not be seen by other lenders.

Factoring BNPL lending into credit reports will allow consumers to better demonstrate their ability to make timely payments. It will help them track and understand their spending and the impact of their BNPL agreements on their broader financial standing.

Exactly how consumers will react to the changes remains to be seen and will undoubtedly impact behaviours in the event of an increased ability for BNPL agreements to affect their overall credit position. This reinforces the importance of consumers having easy access to their credit information and an awareness of how it is used within lending decisions, so they can monitor its accuracy. Education will be key, so that consumers understand how and why the data will be shared.

For providers to retain and continue to grow their customer base, how they respond to this evolution will be fundamental in determining long-term sustainability and brand reputation. Alongside this, a key focus will be on maintaining a seamless customer journey alongside any additional checks to be conducted, so that the speed, ease, and convenience which have made this type of credit so popular are retained.

BNPL could be a ripe area for exploring potential partnerships between fintechs and traditional banks, bringing together core capabilities and differentiators to help meet customer needs and develop more personalised experiences.

However, transparency will be crucial when it comes to joint initiatives, as trust is a key factor for UK consumers when choosing a finance provider. Over a third (36%) make their choice on that basisv, according to TransUnion’s previous research, and that figure may well have risen in the wake of the pandemic.

With new regulation coming into effect, existing fintech providers serving this market may want to expand their customer base with a broader financial offering. Here, a more traditional banking provider could bring the expertise and scale needed. Ultimately, the guiding principle for any strategic partnerships should be based on consumer needs. As we collectively come to terms with the financial shock of COVID-19, supporting customers and facilitating broader financial recovery must be the priority.

BNPL fills a real need for consumers, which is only going to grow as financial instability remains likely post-pandemic, and it offers an alternative to high-interest credit cards. But by working collaboratively, BNPL providers, credit reference agencies and industry bodies can help navigate the path to better consumer protection, more informed risk assessments, and a more holistic view of an individual’s financial situation – while also maintaining the mass appeal that saw this form of credit become so popular in the first place.

Stephen Wishart
Director of Fintech
TransUnion (UK)