1. What is a BNPL payment option?
A BNPL payment option allows a customer to buy now and pay later. The pay later aspect usually involves paying in full by a certain date so that no interest is charged. Consumers may be more familiar with BNPL options appearing online when they come to making large purchases like laptops or fridge freezers. BNPL payment options are increasingly being accepted by online clothing, holiday, home and shoe retailers.
2. How do online retailers implement BNPL payment options for consumers?
BNPL payment options can come in a number of guises:
- a consumer may get 14 - 30 days from delivery to pay for coat they buy online; or
- the consumer could buy the coat and pay for it over 3 instalments; or
- if the coat was particularly expensive, the consumer may opt for longer term instalments over 12 months.
Consumers will usually encounter BNPL payment options at the point of sale. Along with symbols like Visa, Mastercard and Paypal on the payment screen, the consumer will see a symbol for a BNPL payment option. Alternatively consumers may choose to download the app of a BNPL funder and search for online retailers that accept the funder's finance option.
Different online retailers will accept different BNPL payment options. Even where an online retailer accepts a broad range of options not all consumers will qualify. For example, the consumer may be accepted for buying a £50 coat now and paying 14 days from delivery but not for buying a £1000 coat now and paying over 6 months.
3. What contractual arrangements are put in place with the funder?
The online retailer will usually enter into a contract with the funder, often referred to as a merchant agreement. The consumer will not have sight of that contract. The funder will pay the online retailer for the goods upfront so the online retailer is not out of pocket.
The consumer will owe the funder for the goods. It is the funder that the consumer will be paying later, not the online retailer. If the arrangement is captured by FCA rules, the consumer will enter into a regulated credit agreement with the funder to finance the goods (or goods and services).
4. How are online BNPL payment options for consumers regulated?
A number of online BNPL payment options are now subject to the FCA Handbook Consumer Credit sourcebook [CONC].
The FCA implemented rules on 'BNPL credit'. When putting in place their new rules, the FCA had in mind arrangements that typically give consumers up to 12 months to repay without interest being charged. In order to be caught by the FCA definition the initial interest free period must be at least 56 days or more. The normal interest free period on a catalogue or store card credit, where a consumer pays off their balance in full, would not be caught by the FCA BNPL credit rules.
Since 12 September 2019 firms offering BNPL credit have been required:
- to comply with FCA guidance on communications and financial promotions [CONC 3.3.11A G]
- to provide consumers with an explanation of the method by which they will be charged interest if the consumer fails to repay within the BNPL offer period [CONC 4.2.15R (8)]
- to issue prompts before the BNPL offer period ends [CONC6.7.16A R]
If a consumer was buying a coat online and wanted to pay for it in 3 months time, any communications about BNPL credit would need to include information about the relevant risks. Before buying the coat the consumer should receive an explanation setting out how interest would be charged if they paid for the coat after 3 months. The consumer should also expect to receive a prompt before the 3 month period ends.
The form of prompt is not prescribed so it could be a text message or a note in the consumer's statement. The rules do not set out the exact time for sending the prompt. Firms are to judge the most appropriate method and time for sending prompts.
5. What changes will new FCA measures that come into effect on 12th November 2019 introduce?
From 12 November 2019 firms will no longer be able to backdate interest on sums the customer has repaid over the BNPL offer period [CONC 6.7.16B R].
A customer buys a coat for £300. They decide to pay for the coat in monthly instalments of £50 over 6 months. They make the repayments on time for 5 months. When it gets to the last repayment date they cannot afford to make the payment on the specified date. They can make the repayment 2 days later. The online retailer would no longer be able to charge interest on £300 from the point the consumer bought the coat. The £250 repaid by the customer would not be subject to interest.
The new rule will only apply to purchases made after 12 November 2019.
6. How will these changes affect online retailers and what steps should they take?
Online retailers will need to look at their contractual terms and accounting systems, both consumer and funder facing. Online retailers will need to look at their customer journeys and invest in staff training ahead of 12 November 2019
The challenges are likely be greater for funders who will need to change core IT systems due to the change in the calculation and application of interest.
Within the industry there have been concerns over the 5 month implementation period. The FCA were keen that the changes be implemented in early November to enable Christmas shoppers to benefit. The FCA estimate that the package of new measures will save consumers £40-60 million a year.
This article was first published on Lexis®PSL Commercial on 25 October 2019. Click for a free trial of Lexis®PSL.