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Written by Alina Kazmi
‘Buy now, pay later’ companies have raised millions of pounds as consumers look for an alternative form of credit. Klarna (founded in 2005) has raised $639m this summer at a valuation of $45bn. This has prompted other sectors to look at the financing method, for example, spreading the cost of holidays and plane tickets.
Jaguar Land Rover and Porsche have joined the ‘buy now, pay later’ (BNPL) trend by investing in Bumper, a London-based start-up that offers competitive car repair prices. As part of a £9m in Series A funding round, both carmakers have taken stakes in Bumper which would help the businesses divide costs of aftermarket support and repairs into interest-free monthly instalments. The European aftersales market is projected to hit €300bn by 2030, states Bumper, which is already in profit and expects to triple its gross merchandise value (GMV) by the end of 2021.
Bumper does not take out payday loans or use credit cards, but works with 3,000 car dealers and car manufacturers, such as Volkswagen Group, to stagger consumer payments. Bumper provides a digital payment platform for vehicle repairs and services via a BNPL model. Other companies such as Monzo have also explored BNPL services to take on rivals such as Klarna. Bumper receives a commission for the sales it secures and aims to boost conversion rates for dealerships by reducing initial payments from drivers.
The funding round was led by Autotech Ventures, Porshe Ventures and Jaguar Land Rover’s InMotion Ventures. It also saw cash provided by angel investors, bringing the total funding raised by Bumper to £13.19m. Alex Smout, Principal at InMotion Ventures, says, ‘Buy Now Pay Later is the fastest growing online payment method globally.’
Bumper aims to use the £9m funds to add another 80 staff to its headcount of 40 and launch a consumer app in Germany, Spain and the Netherlands. Part of the funding will be used to hire in these new markets, scale the tech team, and marketing efforts.
Risks of BNPL payment providers include companies like Klarna performing soft credit checks on their customers, to ensure that they will be able to keep up to date with their repayments. Therefore, such providers hold information about consumers such as their credit history and age. BNPL payment methods can have a negative impact on users’ financial well being and credit score, where some payment providers share the results of credit checks with credit lenders. Arguably, it could lead to consumers purchasing services or goods that are not within their means and can default later. If consumers do not keep up to date with repayments, providers often pass accounts onto debt collection agencies, after a specified period of non-payment has occurred. Consumers are not aware that a missing payment could affect their credit score: 41% of BNPL users confirmed that they did not know their credit score could be affected in a Compare the Market survey. The lack of clear, readily accessible information about the risks surrounding these types of payment methods has the potential to seriously jeopardise users’ longer-term credit-borrowing plans, such as securing a mortgage to buy a property.
BNPL is currently unregulated. The UK Treasury has opened a consultation into the shape and form of regulation for ‘buy now pay later’ (BNPL) products, in a bid to reduce consumer harm. BNPLs are unregulated because most providers do not charge their customers interest, and therefore, fall beyond the remit of regulation by the Financial Conduct Authority (FCA). For longer-term financing options, BNPL charges interest but the FCA brought reform, as providers must remind consumers that the initial offer period is about to end to encourage consumers to repay credit before interest incurs.
Changes must be required for BNPL providers, for example, how affordability checks will be carried out and how mandatory disclosures will be made. The agreement with customers will likely need to be in the form prescribed by the Consumer Credit Act. However, if a flexible payment method becomes tightened to improve consumer protection, would that defeat the aim of BNPL providers? BNPL providers would need law firms’ help to carefully consider their regulatory position once the Government publishes specific legislative proposals to regulate BNPL services.
BNPL providers are useful, as they offer consumers the ability to shop flexibly and purchase items after they have had the opportunity to try them. Retailers benefit too, as flexible payment methods draw in more customers that otherwise may not be able to afford to purchase things up front, and customers are shopping more frequently.
However, retailers may see a high increase in the number of returns from customers. For consumers, BNPL services could negatively impact their credit score, which may have long-term consequences on their financial health and future borrowing potential.
Poor understanding of BNPL products and inconsistent treatment of customers in difficult financial situations are seen as emerging trends in this market. Therefore, many are welcoming change and regulation tightening will align with the wider consumer credit market. For now, we are seeing several sectors contribute to the craze of BNPL payment methods, and the way consumers are shopping and buying services is rapidly changing.