It was recently reported that Marks & Spencer is to offer a ‘buy now, pay later’ option on its website for online customers. The company  is modernising its services with the introduction of this payment scheme. Marks & Spencer joins the likes of ASOS and H&M in offering buy now, pay later (“BNPL“) services.

How does it work?

BNPL is typically an interest bearing option that enables customers to delay paying for goods or by paying in instalments. Delayed periods can be as long as 12 months. It differs from hire purchase because with BNPL, the customer owns the goods on purchase, it is just that the due date for payment for the goods is delayed.

Klarna, a popular BNPL provider used by over 4,000 UK retailers, offers three types of BNPL service:

  1. delayed payment up to 30 days after purchase. This incurs no interest or fees, providing the payment is made within the timeframe.
  2. instalment options whereby the purchaser can pay in three equal, interest-free payments every 30 days.
  3. flexible financing, which spreads the cost of larger purchases into manageable monthly payments. The term for this repayment option ranges from six to 36 months.

Like with many BNPL providers, the Klarna platform requires the customer to inputs their personal details on checkout, which include the customer’s full name, email address, phone number, billing address and date of birth. These details are used to perform a credit check on the customer. This is not a comprehensive credit check, but rather one which assesses whether the customer has had any repayment problems with retailers before. If not, an approval is quickly processed.

Klarna has recently been heralded as Europe’s most valuable fintech after being valued at $5.5bn. By spreading the cost, a consumer is more likely to purchase more. The co-founder of Laybuy, another BNPL provider, said: “a shirt costing £60 is six £10 payments. So you might as well buy two, because it’ll only cost you £20 today leaving you £40 to go and have some beers with your mates”. Indeed, this has led Michael Rouse, Klarna’s Chief Commercial Officer, to suggest “the demand for personalized shopping and ease of transactions are no longer trends in retail – they are now requirements”.

FCA Guidance

In June, the FCA published its Policy Statement (PS19/17) including new final rules for the BNPL market.  This includes a ban on firms charging backdated interest on money that has been repaid by the consumer during the BNPL offer period. The origin of these new FCA rules was partly in response to concerns around spiralling consumer debt and also to meet allegations that some BNPL models lacked transparency or were unfair.

Initially, most BNPL offerings provided a promotional period (often 12 months) during which repayment was not required and interest would not accrue. However, if the full amount was not repaid during the promotional period, BNPL providers would backdate interest on the paid and unpaid amounts from the date of purchase.

The FCA new rules:

  • prohibit BNPL providers from backdating interest charges on paid amounts;
  • require retailers to present BNPL offers to consumers in a clear and balanced way, providing adequate explanations of the costs and potential negative consequences; and
  • require BNPL providers to prompt consumers when the 0% interest period is about to expire.

The new prohibition comes into force on 12 November 2019 whilst the two new requirements have been in force since 12 September 2019.

The Executive Director of Strategy and Competition at the FCA stated that the new changes “are intended to simplify these products and make it easier for consumers to make informed decisions.”

A BNPL offer will also need to comply with the UK Code of Non-Broadcast Advertising and Direct & Promotional Marketing (CAP Code), which governs advertising, marketing and sales promotions standards and conduct in the UK. It is crucial that BNPL providers market their offers in a way that is compliant with UK law and advertising regulation to avoid any complaints from consumers and investigation by the Advertising Standards Authority, FCA or other regulators.

Economist view

Richard Lim, CEO, Retail Economics comments that:

A new retail paradigm has emerged where consumers expect to seamlessly transition from physical to digital channels, often at the same time, in a frictionless path to purchase. Technology giants such as Amazon, Netflix and Uber have raised expectations when it comes to ease, speed and payment options. As consumers embrace new and emerging technologies, the customer journey has become infinitely more complex with BNPL options emerging as an effective proposition for retailers keen to differentiate against their competitors.

 This shift in purchasing behaviour has been most disruptive within fast-fashion and for brands targeting Gen Z consumers. The crave for newness and online social approval has dovetailed harmoniously with shoppers eager to try online purchases before they buy, removing a key barrier in online fashion shopping. With online now accounting for almost a third of all fashion sales, but industry return rates bouncing between 30-40%, BNPL payment options will further cement this behaviour providing a competitive advantage for retailers with the most efficient supply chains and logistics capabilities.”

Please contact Carlton Daniel or Paul Anderson if you are a retailer or BNPL provider requiring expert advice in this area. Squire Patton Boggs has a team of experts in consumer law, data-privacy law and financial services regulatory law which specialises on advice to the retail sector, and deals widely with fintech businesses.