Afterpay and Zip Co could be forced to conduct more detailed checks on United Kingdom customers, potentially dampening the industry’s growth after a government review said the buy now, pay later (BNPL) boom was putting some customers at risk.
As usage of BNPL products surges, investors expect some amount of regulation, and a review for the UK’s Financial Conduct Authority (FCA) said there was an urgent case for protecting consumers. Buy now, pay later providers offer instalment loans to shoppers, charging merchants or consumers a fee for the service.
While the review did not specify how the sector should be regulated, analysts said providers could be forced to conduct affordability checks, which may slow down the industry’s rapid growth. Even so, most analysts said this would only marginally affect the longer-term growth prospects of BNPL businesses.
Citi analyst Siraj Ahmed said requiring BNPL firms to gather more information about their customers was a risk to take-up of the service, but it would not be a “material headwind” to Afterpay or Zip. “While it is unclear what additional checks the BNPLs would need to conduct, the need for additional information from consumers is a risk to the take-up and use of BNPL,” Mr Ahmed said.
Roland Houghton,, an investment analyst at Milford Asset Management, also said moves by UK regulators could slow down payment approval times by requiring Afterpay to go into greater detail and carry out some form of credit checks. However, he expected UK regulators would ultimately reach the view that BNPL was a more consumer-friendly product than some other alternatives.
“I don’t see it derailing the medium term opportunity – it delays it,” Mr Houghton said.
UBS analysts led by Tom Beadle were more pessimistic, saying the intervention of regulators could slow the growth of the sector, compared with the market’s expectations.
Use of BNPL products surged nearly fourfold in the UK during 2020, prompting the review for the FCA, which found the sector’s emergence gave consumers an alternative to high-cost credit, but there was an urgent need to protect consumers through regulation of the industry.
The review said more than one in ten UK customers of major banks using BNPL products were already in arrears. However, it also said it was not clear that prescribing a minimum set of checks for firms to conduct would lead to better outcomes for customers.
Afterpay shares fell 1.3 per cent to $144.75, while shares in Zip fell 1.1 per cent to $7.86.
Afterpay, which trades under the name Clearpay in the UK, said it welcomed the announcement and it would work with regulators. “It has always been Clearpay’s view that consumers will be best served by products designed with strong safeguards and appropriate industry regulation with oversight from the FCA,” said Clearpay’s executive vice president of public policy, Damian Kassabgi.
After Zip launched its UK business in December, co-founder Peter Gray said the review was a positive step for the industry, and it would work with UK authorities. “As a global business, Zip is comfortable operating in a regulated environment and has always had a strong focus on responsibility, affordability, fairness and financial wellbeing,” Mr Gray said.
Klarna, an unlisted Swedish BNPL business which is 5 per cent owned by the Commonwealth Bank, is also a major operator in the UK.
Chief executive of payments consultancy McLean Roche, Grant Halverson, said Australia had a higher proportion of customers using BNPL products than the UK, noting that authorities in Europe and Canada were also looking into the issue.
While the Reserve Bank and the Australian Securities and Investments Commission have opted against regulating BNPL products so far, Mr Halverson predicted the local sector would eventually face more regulation.
“The investors will start asking questions if nobody else will,” Mr Halverson said.
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Source: Thanks smh.com