Securitization of Buy Now Pay Later loans as the deferred payment credit industry booms

The Buy Now Pay Later (BNPL) sector grows and evolves at the pace of a sprinter. No longer the niche payment method for millennials making relatively low-value fashion and cosmetics purchases, the demographics of BNPL borrowers are changing, with the types and value of items that can be purchased with deferred payment credit. Expanded, BNPL applications can also be used in-store as well as online, and can be used even in the absence of a partnership between the BNPL provider and the retailer. Even traditional banks and lenders, anxious to capture income that has been diverted from their credit card and personal loan income sources, are getting involved.

There is no slowing growth in this sector, revealed in the Woolard Report (and as we discussed here) to have quadrupled in 2020 and noted by the Brodies securitization team while we are advising on the increase in securitizations of consumer receivables derived from BNPL.

The regulation of BNPL products which currently benefit from an exemption from FCA regulations is on the horizon. However, as the Woolard Review called for urgent legislative action in this area to bring BNPL within the regulatory scope, and despite the FCA’s statement in its 2021-22 business plan that he will consult on the new rules in 2022 once the Treasury has consulted on the scope of the regulatory regime, there is no sign of consulting the Treasury at this time.

The consultation on the scope of the new FCA regime and rules, and the subsequent implementation of these rules, will take time, during which we can expect the BNPL sector to continue to grow and develop. to gain momentum. After a slow start, once regulatory change gets out of the starting blocks, it will need to catch up with a fast, vibrant and booming BNPL industry. The regulations will likely have an impact on the securitization of BNPL derivative claims; originators and investors looking to enter into this type of securitization in the future should be aware of the ripple effects of the new regulatory regime once the details become clearer.

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Elaine R. Knight

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