'Buy now, pay later' (BNPL) allows customers to buy products and spread the cost in interest-free weekly or monthly instalments, unless payments are received late, in which case interest and/or late payment fees usually apply. BNPL works by the lender paying the total fee upfront - minus a merchant fee - and then collecting monthly payments from the client.
The growth in the value of non-legal transactions using BNPL by companies such as Klarna nearly quadrupled between January and December 2020, with spikes correlating with the national lockdowns. With the value of these transactions now standing at £2.7 billion, an increasing number of consumers are benefitting from the speed and flexibility the service offers.
For service providers, BNPL helps to improve cash flow, and so it is unsurprising that law firms have begun to use it to help clients pay their legal fees upfront. Providers such as LawPay, QuickaPay and Feesier are beginning to offer BNPL to law firms in the USA, Australia and the UK.
BNPL offers several advantages to consumers. When provided to clients who can afford to repay on time, it is a significantly cheaper alternative to traditional forms of credit. This could potentially allow law firms to fill the large gap of unmet legal need and improve access to justice.
It is also a faster method of raising funds to cover legal costs. Traditional financing options available to customers typically involve external loan application processes. In contrast, BNPL can appear directly in a law firm's website check out and the application procedure typically take seconds.
Furthermore, BNPL can improve lawyer-client relationships. As BNPL allows clients to pay legal fees upfront, lawyers should spend less time chasing payments. Therefore, communication between lawyers and clients become less about the bills and more about the client's legal problems.
There are risks associated with BNPL. These are similar to those associated with using BNPL to make ordinary purchases. Many consumers may not view interest-free BNPL as a form of credit - especially as it is often associated with payment apps, such as Google pay, Apple pay or PayPal - and so may not scrutinise their spending in the way they would other loans. The attraction of BNPL to retailers is that it encourages increased spending by consumers; however, this can also be a detriment to buyers of legal services as they may be tempted to overspend.
The familiarity with BNPL means that consumers may end up accumulating multiple debts with various schemes - causing issues and stress for individual consumers, but also making it difficult for credit reference agencies and mainstream lenders to assess would-be borrowers. BNPL may well increase the access to legal services, but that does not necessarily equate to affordability. This is of a particular concern if customers cannot pay on time as in those instances the accumulation of interest is likely to bite. For example, one provider applies late payment and collection fees, albeit capped at around £140.
Law firms may also seek to recover from their clients the fees that BNPL providers charge the law firms for using their platform. For example, one BNPL provider charges 5 per cent merchant fees when clients pay in instalments. This might tempt the merchant to increase fees by 5 per cent to recover the loss.
Another area of concern is the lack of regulation. As a formal agreement to pay the items in instalments, BNPLs technically fall out of the regulatory framework provided by the Consumer Credit Act 1974 (CCA) and the Financial Services and Markets Act 2000. The recent popularity of BNPL products has brought about increased interest from regulators. In 2021, following the Woolard Review, the Financial Conduct Authority (FCA) declared its interest in wanting to see greater regulation of the BNPL sector, while the government announced its intention to regulate BNPL products in order to protect consumers from using unregulated loan facilities.
In October 2021, the Treasury opened a consultation on regulating the BNPL sector, which highlighted various concerns with the market. These included whether BNPL should fall more strictly under the requirements of the FCA, CCA and/or the Financial Ombudsman Service around, for example, credit broking regulations, advertising and promotion, pre-contract information, the form and content of credit agreements, creditworthiness assessments, helping consumers in financial difficulty and resolving disputes. The Association of Consumer Support Organisations (ACSO) awaits the Treasury's response to this consultation, which has since closed.
It seems that while BNPL is a burgeoning market, attempts at its regulation across the whole market and its application to the legal sector specifically are in its infancy. While there are clear advantages to consumers using BNPL to pay bills, careful consideration of any disadvantages is still required.
Author: Alex Diaz, Trainee Solicitor at Lyons Davidson Solicitors and ACSO secondee.