The retail technology community has been absorbing the latest regulatory proposals to its ecosystem.
UK government has published a consultation paper on the future regulation of buy now, pay later (BNPL), the tech-enabled payment method that has grown in popularity among consumers and accelerated in usage in the past 18 months.
Specifically, HM Treasury intends to regulate interest-free BNPL products, which are offered by many retailers as a way for shoppers to split payments when they buy goods online and, in some cases, in stores.
Potential risks to consumers were highlighted earlier this year in The Woolard review: A review of change and innovation in the unsecured credit market, which talked up the need to modernise regulation as the payments industry innovates.
The consultation document includes proposals such as access to the Financial Ombudsman for consumers if things go wrong with BNPL providers, as well as extensions of protections that already apply to credit cards.
Research group Finder reports 37% of Brits have used a BNPL service, such as Klarna, Laybuy or Openpay, and estimates online purchases using BNPL services are growing at a rate of 39% per year – with usage multiplying in the pandemic.
The providers’ response
Alex Marsh, head of Klarna UK, which works with retailers such as Asos, H&M and Ikea, said he welcomes regulation. “Ultimately, this will drive consistency and improve outcomes for all consumers,” he said. “As more companies, including incumbent banks, enter the sector, it is essential we do not allow the typical dirty tricks of the old banks to continue whereby consumers are trapped in debt with fees and high-interest charges.”
Marsh talks up the need for innovation in the credit space – indeed, it is the respective ease at which BNPL providers can be added to merchants’ modern tech stacks and the app-based structure they operate on that has proven so popular with retailers and consumers.
“Regulation must support stronger and healthier competition between banks and providers, with innovation and consumer outcomes at the heart, rather than length of time in the market,” said Marsh.
“This competition will in turn lead to the development of better products, processes and systems. This would benefit consumers by protecting them from being locked in with one provider offering poor value products, and from the risk of being cross-sold simply bad products.”
Meanwhile, Gary Rohloff, managing director and co-founder of Laybuy, which works with retailers such as Boohoo, WHSmith-owned Funky Pigeon and JD Sports, also welcomes the move towards BNPL regulation.
“It’s perhaps a smaller point, but we’re pleased that the government addresses and recognises how BNPL is supporting smaller online traders,” he said, reflecting on the consultation document. “Introducing stricter rules – credit broking regulation – would have a severe impact on many of these companies.”
Rohloff said retailers should be “very suspicious” of any BNPL or credit provider which did not think implementing hard credit checks prior to lending was in the interests of their customers and their own business. “BNPL is becoming increasingly popular and I think it is only right we seek the highest standards across the industry,” he added.
The retailers’ view
Many retailers view BNPL as a key element of a modern digitally enabled customer proposition, and several retailers have embedded this type of payment method to keep up with competitors and consumer demand.
Aynsley Peet, e-commerce director at Cox & Cox, said the introduction of BNPL last year was a key part of the homeware retailer’s ongoing tech stack evolution.
“The decision to put Klarna’s payments gateway in was in reaction to noticing a younger demographic starting to interact with the brand on social media, as well as continued growth in sales generated via mobile devices,” he said.
In the four months immediately after implementing Klarna in April 2020, Cox & Cox conducted 3,000 transactions via the payments tech platform, highlighting its instant impact on commercial performance, according to Peet. “We put in Klarna because we could see the change in demographic, but also over 60% of our users are using mobile,” he said.
Such comments suggest the technology supporting BNPL fits the way modern consumers shop – on their phones and with the support of apps. From a corporate technical perspective, retailers tend to talk favourably about the integration capability, too.
Nick Owen, director of technology at The Conran Shop, which does not yet offer BNPL, has experience in dealing with the tech from working at swimwear brand Orlebar Brown, where until this year he was head of IT.
He talks positively about systems in place that mean any payment made with Klarna cannot be significantly changed once it had started, for example, if a product is out of stock it is difficult to amend the order without restarting the whole transaction. He saw that as a natural safety net and a standout feature. “Basically, you can’t mess with the transaction,” he said, adding that in terms of software integration it neatly fits in with major payment service providers.
Talking more widely about BNPL, Owen said: “Experience is everything these days, and if you can get a customer to part with their money for something they want – and they feel good about it – that’s a really positive thing.
“I wouldn’t consider these suppliers disreputable – it’s not like Wonga,” he said. “If they were offering absorbent fees, I don’t think we’d offer it to customers.”
On potential usage of BNPL at The Conran Shop, which Owen joined at the start of 2021, he said: “I expect it will turn up online at some point and I’m sure we’ll see it in stores as well – the business is a good fit for it.”
Other retailers Computer Weekly spoke to welcomed the imminent regulation, recognising it will provide transparency and consistency for customers – and, in some cases, stronger partnerships between merchants and the technology providers. For some, BNPL regulation is a deal-breaker itself in launching it as a payment option.
Other retailers, particularly those with smaller average transaction values, said they have no plans to introduce it as a payment method.
Jennifer North, head of digital experience at Hobbycraft, said the imminent regulation makes the concept of adding BNPL options to its website “more interesting” to the arts and crafts retailer.
“We welcome anything that’s right for the consumer,” she said – although Hobbycraft does not provide BNPL on its website, and does not currently have plans to do so.
So what’s the big deal?
Consumer champion and Money Saving Expert founder Martin Lewis has long called for regulation of the BNPL market – and although welcoming the government’s latest commitments, he worries it is moving too slowly.
Acknowledging interest-free BNPL has its place in helping consumers spread the cost of purchases when “done right, used right”, he has concerns “it is sold to retailers as an easy way to get people to spend more”. That combined with the popularity among young adults is a “red flag”, according to Lewis.
“I think more flesh on the bones is needed on the plans to tackle problems on the design and marketing of BNPL,” he said. “These firms are slick, and their often irresponsible advertising and tech push is a recipe for encouraging overspending and consumer harm.”
The largest BNPL providers each say they have measures in place to prevent irresponsible lending, and argue they present more consumer-friendly options than incumbent credit card operators. But the debate about their pros and cons will continue.
Finance industry, consumer groups and interested parties, including retailers and other consumer-facing businesses, have been given until 6 January 2022 to respond officially to the HM Treasury’s consultation document.
What is certain is that regulation is coming to a retail technology sector that has grown so much in recent years.
