Buy Now, Pay Later Regulation in the UK: Will it affect B2B Players?
The proposed regulation will land later in 2023. What impact will it have?
Buy Now, Pay Later (BNPL) solutions have become explosively popular worldwide, and nowhere is this more evident than in the United Kingdom: according to government estimates, BNPL usage in the country nearly quadrupled in 2020. It has continued expanding rapidly ever since.
With such blistering growth, the UK government has kept a wary eye on the industry. BNPL products are unregulated under a legal exemption in financial law, and the government’s concern is that as unsecured, unregulated credit agreements, BNPL products may allow consumers to take on harmful levels of debt.
In 2021, the government published an article stating the ‘urgent need to regulate’ the industry. Since then, it has expedited legislation to begin regulating BNPL products. The proposals have been reviewed in two rounds of consultation with industry stakeholders and are slated to take effect late in 2023.
The potential effects of the new rules are likely to significantly reshape the BNPL landscape in the UK. What is the scope of changes, and what are the likely effects?
Since we at Wiserfunding work with SMEs, we’re also investigating: will the new regulation affect B2B players as well as B2C? In this post, we’ll dive into the draft proposal to answer these questions using commentary from legal experts.
Buy Now, Pay Later products enable buyers to spread the cost of a particular product over a series of payments. The UK government defines BNPL as ‘a type of interest-free instalment credit which allows borrowers to split the cost of purchases into regular repayments not exceeding a 12-month period.’
To users, these products are typically shown during online checkout as a form of payment. To lenders, they function as a form of unsecured lending.
When we think about BNPL, companies such as Klarna and Afterpay come to mind first. These fintechs have achieved multi-billion dollar market sizes across the globe by offering BNPL products to consumers.
Yet what’s less discussed is the world of business-to-business (B2B) BNPL options. Businesses benefit from the same type of financial products, though because they don’t market to consumers, have less mainstream awareness. What are the similarities and differences?
B2B vs. B2C BNPL
The mechanics of B2B BNPL products function nearly identically to consumer (B2C) options. They enable businesses to purchase a product or service and repay over a series of instalments over a short-term period (typically 3-12 months with a similar number of payments).
While the structure of BNPL products remains largely the same, there are four main differences between B2B and B2C offerings:
- Customers: B2B BNPL customers are businesses rather than consumers (quite obviously). Because businesses have significantly different financial structures than individual consumers, the underwriting process for B2B BNPL involves a more complicated set of credit factors beyond credit scores alone.
- Products: Consumers typically use BNPL offerings to purchase small to medium-value products, such as clothes, technology, and even groceries. Businesses often use them for higher-value purchases – not only for physical items, such as laptops or equipment, but also for services, such as recruiting agencies.
- Purchase flow: Consumers often use BNPL products at the point of checkout. For example, a shopper on Asos could use Klarna as a payment method instead of a debit card. By contrast, many B2B BNPL agreements occur outside the exact point of sale because many business transactions do not follow the same online checkout flow. For example, a CEO may hire a recruiting agency and then take the unpaid invoice to a B2B BNPL after the purchase to have them pay the recruiter directly.
- Credit size: Because businesses typically have greater spending power from larger financial structures, their purchases are often larger than individual consumers. As a result, the size of their BNPL credit lines is typically larger.
The likely impact of BNPL regulatory changes
Today, all BNPL products in the UK are unregulated, just like they are in many parts of the world. They leverage an exemption under the Regulated Activities Order (RAO) of the Financial Services and Markets Act of 2000. As Gavin Punia, Partner at law firm Bird & Bird explains, “Firms providing BNPL products benefiting from the 60F Exemption [under the RAO] do not have to be FCA authorised, and the agreements do not need to be in a prescribed form under the Consumer Credit Agreement of 1974.”
The proposed legislation is not yet finalised, but legal experts have assessed the rough direction of travel of the changes. We have summarised their findings below.
BNPL lenders will be the most impacted
Most BNPL products will now require FCA regulation. This leaves providers with two options: change the structure of their products and/or apply for FCA regulation.
FCA regulation will require both an application phase and an ongoing compliance component. The application process has not yet been detailed and will fall to the FCA’s discretion once the legislation passes.
One of the key provisions for future FCA compliance will require that BNPL providers provide routine data reporting to the 3 core credit agencies. This reporting is a critical aspect of ensuring that BNPL underwriting is treated like a credit product so that users do not become overburdened by debt.
Additionally, BNPL providers will have to change to comply with the CCA. The biggest impact of this change will be greater scrutiny over marketing descriptions. Similar to other financial products, such as credit cards and brokerage accounts, lenders will need to ensure their messages are considered safe and accurate under CCA guidelines. For consumers, this will likely mean less flashy advertising and more fine print.
Lastly, BNPL lenders will have a new duty to treat customers fairly (TCF). According to law firm Norton Rose Fulbright, courts “may make an order if it determines the relationship between the lender and consumer is unfair as a result of any terms of the underlying agreement, or any action done by the creditor which may allude to an unfair relationship being present which is detrimental to the consumer”. Customers will be able to complain to the Ombudsman if they believe they have been treated unfairly.
Merchants will not be impacted directly
Since merchants do not lend directly, “the Government considers that it would be disproportionate to regulate merchants who are introducing their customers to BNPL providers and so broadly intends to maintain the status quo,” Punia from Bird & Bird explains.
However, merchants will need to get their marketing copy approved or pre-approved to comply with the Financial Promotions Order (FPO) regime.
To return to the Asos and Klarna example: Klarna will need to apply for regulation and/or restructure its products, but Asos will not need to apply for regulation. Asos will, however, need to receive approval on marketing copy related to its BNPL checkout options.
Consumers will feel the impact in a few ways. The checkout process using BNPL is likely to be longer, with more steps required to input details for credit checks. The process will feel slightly more like applying for a credit card.
Over time, the number of options between BNPL companies and products is also likely to decrease. According to law firm Osborne Clark, “The impact of all these changes is likely to mean that the choice of BNPL products available for consumers is reduced. Some currently exempt BNPL lenders may decide either to withdraw from the market entirely (rather than face the increased costs and operational burden of being an FCA regulated firm); or to obtain FCA authorisation for lending but ultimately decide that it is no longer a cost-effective model to offer credit free of interest and charges to customers.”
Will the changes affect B2B BNPL?
In one word: no, the changes will not impact B2B BNPL.
The government’s concern driving the legislation is unreasonable debt levels among consumers – not businesses. The law deals with “regulated consumer credit agreements” as set out in two laws (CCA and FMSA).
UK law defines a consumer as “a natural person who in making a contract [is] acting for purposes which can be regarded as outside his trade or profession”. While sole traders and business partners can sometimes be considered consumers, business transactions are not.
The government has explicitly clarified that businesses, trade credit, and interest-free running account credit (e.g., credit cards) are outside of scope. “The exemption available for higher value business lending to sole traders, small partnerships and unincorporated associations will not be affected, and the government also does not intend to affect firms' ability to offer invoicing and trade credit outside the scope of regulation,” Osborne Clark explains.
There are a few exceptions to this rule for micro businesses. In addition to individuals, lending to 'relevant recipients of credit', including sole traders, unincorporated associations, and partnerships of fewer than four people, will fall within the regulatory scope, according to Clifford Chance.
What’s next for the regulation
As of the writing of this article, the government has closed its second round of consultations with industry stakeholders on the draft legislation. In the coming months, it will issue a new draft proposal and will work with the FCA to determine the details of regulatory requirements.
Since the UK is one of the global pioneers in BNPL regulation and many unanswered questions remain regarding specifics, the market impact of the regulation is unclear. The new rules are very much an experiment. Since the regulatory burden will be higher, we will likely see fewer regulated operators and fewer credit options.
Regardless of the consumer impact, B2B players will continue to operate under existing rules. While this means that their regulatory burden will not increase, it still underscores the importance of a robust credit risk management approach.