Fractional payments, i.e. paying for a purchase in 3 or 4 instalments or at a later date, are booming. It is not subject to consumer credit regulations, and is beginning to attract the attention of the authorities.
A light regulatory framework
First introduced in France in 2010, fractional or deferred payment ("buy now pay later", BNPL) is now booming. The Covid-19 pandemic has prompted consumers to turn en masse to e-commerce, where payment in 3 or 4 instalments over 3 months is enjoying great success.
Before the start of the health crisis in 2019, 60% of European consumers had already chosen to pay for a purchase at least once in instalments. The procedure is very simple: in a matter of seconds, buyers obtain their financing without having the impression of taking out credit.
Since the Lagarde Act came into force in 2010, consumer credit has been subject to strict regulation. In particular, these regulations impose an obligation to provide advice, prepare a file and sign a contract, all of which retailers and their bank subsidiaries are exempt from in the case of deferred payment.
In fact, only loans lasting more than 90 days are subject to these regulations. Distributors are therefore able to circumvent the regulations by offering shorter terms and low or non-existent fees.
Excellent results for fractional payment players
Fractional payment players, including many fintechs, are raising funds and setting new valuation records.
At the start of 2021, the two French fintechs Pledg and Alma completed two substantial fundraising rounds, of €80 million for Pledg and €49 million for Alma. In 2019, the market exceeded 6 billion euros in France.
Growth is also on the cards for specialized subsidiaries of traditional banks, such as BPCE subsidiary Oney Banque, whose fractional payments production rose by 40% in the last quarter of 2020.
Swedish fintech Klarna, which is enjoying great success in the USA, meanwhile, closed a $1 billion fundraising round in early 2021, just a few months after raising $650 million in September 2020. It is one of Europe's best-valued fintechs, with a valuation in excess of $30 billion.
Fractional payments: towards a more restrictive regulatory framework?
However, the growth of this market and the fintechs behind it is not always welcomed by the authorities, who fear that consumers opting for fractional payments will become over-indebted.
In the UK, for example, 70 Labour Party MPs passed a bill to regulate the deferred payment market, under the slogan " Stop the Klarnage ". The Financial Conduct Authority (FCA), the UK's financial sector regulator, has also called for urgent regulation to prevent consumers from becoming economically weakened.
In France, the authorities have no plans to change the regulations for the time being. However, vigilance is called for, as pointed out by LREM deputy Philippe Chassaing, who has been tasked by the government with a mission on overindebtedness.