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New guidance for "buy now pay later" services

Posted on 16 December 2020

Regular online shoppers may have noticed a steady increase in the number of "buy now pay later" (BNPL) options appearing during the checkout process. BNPL typically allow consumers to defer full payment for a short period or to pay in instalments, with no interest charged (although there may be charges for late payments). The Committee of Advertising Practice (CAP) has recently issued new guidance for those incorporating such payment options online to cover their use.

The guidance looks to ensure that advertising of BNPL services is not misleading, under Rule 3 of the CAP and BCAP Codes, and that consumers understand the service being offered (including how to settle their balance and what fees they may need to pay) before they sign up. BNPL providers and merchants have until 2 March 2021 to implement the guidance.

Key points from the guidance include:

  • It must be clear that BNPL services are a form of credit and that using BNPL could result in late payment charges, referral to debt collection agencies and a negative impact on credit scores.
  • Marketing communications should not suggest that BNPL are suitable for all customers and are a risk free way of obtaining credit.
  • Any statements that there will be no consequences for missing payment instalments under BNPL services must be substantiated.
  • Claims that BNPL services are "free" may be inaccurate if fees are payable in some circumstances (and so may need to be suitably qualified).
  • Online consumers must be presented with the necessary information for BNPL services, outlined under Rule 14.2 CAP Code, including that any limitations, penalties and terms of withdrawal.
  • BNPL payment options must be made explicitly clear at checkout and other standard payment options should remain obvious.

There have been many reports noting that BNPL services encourage impulse buying and cause individuals to fall into debt. BNPL options are also typically more popular with younger consumers who may be less aware that deferring payment is a form of debt. The role of influencers, such as Love Island contestants, has also been identified as a factor encouraging the use of BNPL services.

BNPL services which charge no interest or fees and are repayable within 12 months are not currently regulated by the Financial Conduct Authority (FCA), although Which? has recently called on the FCA to do so. The consumer group identified that 26% of BNPL users had not planned to use a BNPL service until it was offered during checkout, and 13% had accidentally used a BNPL service because it was pre-selected as the default payment option.

The FCA can only act where it is given powers to do so by the Government. In its 2019-2020 Perimeter Report, which highlights particular issues arising from products that are outside the FCA's remit, the FCA noted the growth in BNPL products and expressed concern that because creditworthiness checks are not required there is the potential for unaffordable borrowing, with consumers at risk of default and incurring increased levels of indebtedness.

Given the risks presented by the consumer credit sector, the FCA is currently conducting a comprehensive review of the future regulation of the unsecured credit market (including BNPL products) led by former interim CEO Christopher Woolard.  Many providers in the BNPL sector, including the largest supplier, Klarna, support the introduction of regulation and it may be more a question of "when" and "how" rather than "if".

This therefore looks to remain an active issue and BNPL providers and merchants are advised to monitor developments in this space.

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