Buy now, hurt later: Aegon AM on the under-regulated lending industry


The Buy Now Pay Later industry has exploded onto the lending scene in recent years, but with its under-regulated practices, companies will struggle to attract public investment unless they start treating customers more fairly and offer suitable products, according to Aegon Asset Management.

Robin Honeyman, responsible investment partner at Aegon AM, says that before any BNPL business can even consider turning to the public markets to grow, it must consider the regulatory responsibilities of traditional consumer lending.

Honeyman says the industry is severely underregulated, leaving consumers with a significant margin of financial harm. This, in turn, is a fundamental ESG consideration that would deter many financial institutions from investing.

“The growth of online shopping during the pandemic has led to the proliferation of Buy Now, Pay Later (BNPL) services that offer consumers the option to receive goods now and pay for them in a small number of installments.

“As BNPL operators are quick to point out at checkout, these loans free consumers from the tyranny of high interest rates and fees associated with credit cards and other traditional loans.

“But it’s at checkout that the problems with BNPL begin,” Honeyman says. “With over 17 million users in the UK alone, there is huge potential for financial harm in this under-regulated space, and the data to support it is starting to emerge. According to the FCA’s Woolard Review, BNPL users are often unaware that they are even taking out a loan.

The BNPL sector is easy to use by design, but the deliberate low barrier to entry masks the nature of the credit agreement consumers are entering into, according to Honeyman.

“At checkout, BNPL is often presented as just another button, with little indication that it is actually the start of a credit application. As such, users often don’t give it the full attention they would give to any other loan application.

“This is by design. To increase adoption, BNPL application processes are designed to be quick and easy. This is achieved by using soft credit checks to assess a customer’s ability to repay their loan rather than more rigorous checks In addition, important information about the consequences of a missed payment is not always clear in the terms and conditions.

“There is evidence that repayment capacity checks do not work. In the UK, 56% of BNPL users who had missed a payment also had credit card applications rejected in the last 12 months. In the United States, approximately 56% of BNPL users were in arrears in 2021.

“Users are often not in a strong financial position to begin with, indeed Citizens Advice found that 42% of BNPL users repay their loans with traditional forms of debt, such as credit cards. In the world of consumer credit, this is playing with fire.

Honeyman adds that there are clear regulatory frameworks to protect consumers, but the BNPL is “go against” principles of this framework, increasing the risk of financial harm and bordering on predatory behavior.

“At the heart of any financial regulatory framework are the principles of consumer protection – treating customers fairly and offering appropriate products. BNPL operators, by hiding what customers sign up for, could be seen as potentially breaching these principles and could increase the risk of financial harm.

“With vital information often unclear, it also attracts the attention of regulators. In the UK, BNPL operators will have to be approved by the FCA from mid-2023, with requirements to make advertising clearer and non-misleading, and accessibility evaluation requirements will be increased.

This, he believes, will limit the opportunities for any BNPL company seeking to list on the stock exchange, as the ESG considerations of most large financial institutions will deter them from investing in the sector without fundamental reform.

“Players in the BNPL space must preempt the inevitable regulatory scrutiny if they are to get the right thing done by their clients and, more cynically, present an attractive proposition when accessing public markets. Any hint of consumer harm will be a big red flag in the ESG ratings of sophisticated investors.

Learn more about Aegon Asset Management.


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