Concerns over spiraling buy now, pay later (BNPL) debt potentially entrapping consumers have prompted the UK to propose new regulations designed to govern the industry.
According to CNBC, City Minister Emma Reynolds compared the current installment loan landscape to the “wild west,” stating that a stronger regulatory framework would not only better protect UK citizens but also provide the industry with a more stable foundation for growth.
The proposed rules would require BNPL companies to conduct credit checks to ensure borrowers can repay their installment loans and to simplify the process for customers seeking refunds. Consumers would also gain the ability to lodge complaints with the Financial Ombudsman, a UK consumer protection agency.
Initial reactions from BNPL leaders Klarna, Affirm, and Afterpay to the UK’s proposed rules have been largely supportive.
“The major BNPL vendors have been preparing for potential legislation in this area for quite a while now,” said Ben Danner, Senior Credit and Commercial Analyst at Javelin Strategy & Research. “Most are prepared for the credit underwriting standards and this is why we are hearing a relatively positive statement from vendors.”
“Implementing higher credit risk controls at underwriting will protect the vendor and the customer and we view it as a good thing for the industry, particularly as BNPL has become a mainstream payment method,” he said.
Mounting Phantom Debt
BNPL services gained prominence as a mechanism to break down larger purchases into loans that are often fee- and interest-free. However, as credit card debt and interest rates have skyrocketed, more consumers have leaned on BNPL for a wide range of purchases—from weekly grocery runs to music festival tickets.
BNPL has been especially popular among younger and lower-income users, as these products typically haven’t required credit checks. Because BNPL companies haven’t been required to report their loan data like credit card issuers do, concerns have emerged about an increasing amount of “phantom debt” that is mounting up.
Navigating the Waters
For their part, BNPL firms have vehemently denied that installment loan debt is soaring. Despite this pushback, BNPL companies have largely supported better regulations for the industry, both in the UK and abroad.
As more countries plan a similar approach, all eyes will be on the UK as it navigates these waters.
“U.S. regulators will certainly be closely watching developments in the UK when it is implemented next year,” Danner said.
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