The UK government is set to regulate Buy-Now, Pay-Later (BNPL) firms, bringing them under the supervision of the Financial Conduct Authority (FCA) after years of industry uncertainty.
BNPL products, which allow consumers to defer payments, saw significant growth during the COVID-19 pandemic but have remained unregulated, leading to concerns over rising consumer debt.
Key players like Klarna and Clearpay will now face new rules to ensure that lending is affordable and that consumers are better protected.
The Treasury’s latest consultation on BNPL regulation will run until 29 November 2024, with legislation expected to be introduced in early 2025 and implemented in 2026.
The FCA will develop a bespoke regime for the sector, integrating elements from the Consumer Credit Act (CCA) to offer protection while promoting innovation in the growing fintech sector.
BNPL regulation has been a contentious issue, with Labour MPs, including Tulip Siddiq, pressing for tighter controls, criticizing delays under the Conservative government. Campaigners, such as Martin Lewis, have called for swift action to prevent consumer harm, particularly as the Christmas shopping season approaches.
With Equifax data suggesting that BNPL is becoming more deeply ingrained in the everyday financial decisions of UK shoppers, any delay in regulation could allow more consumers to accrue unmanageable debt, particularly as BNPL will now appear on credit reports.
In today’s briefing we explore the areas of interest in the regulatory changes for Buy-Now, Pay-Later (BNPL) firms, set to bring the sector under the supervision of the Financial Conduct Authority (FCA) and how it will impact the business model currently in use, and what to do for a better positioning.
What happened
Noting that BNPL users currently do not have access to a range of key protections provided by other consumer credit products, the government announced this Thursday that it has launched a consultation on proposals to fix this by bringing Buy-Now, Pay-Later companies under the supervision of the Financial Conduct Authority (FCA) and applying the Consumer Credit Act, ensuring users receive clear information, avoid unaffordable borrowing, and have strong rights when issues arise.
The Treasury initially promised regulation over three years ago, following an urgent Financial Conduct Authority (FCA) review. However, draft legislation was delayed again in July 2023, leaving the sector unregulated.
Major BNPL companies, including Klarna, have warned the government that overly strict regulations could make their short-term credit offerings “unviable” in the UK market.
Although there is concern about businesses potentially withdrawing from the UK if regulation is too harsh, Klarna has not explicitly threatened to leave.
Labour aims to regulate the sector more effectively, with plans for “affordability assessments” to protect vulnerable consumers and clearer information on BNPL products.
Siddiq has emphasized that Labour wants to make these reforms quickly and ensure BNPL works for both consumers and the market.
While the UK’s regulation is stalled, other regions like Australia and the EU are moving forward with BNPL rules, increasing pressure on the UK to act.
Campaigners like Martin Lewis, the Money Saving Expert, have been pushing for, and it’s finally happening. They’ve been raising alarms about people piling up too much debt with these Buy Now, Pay Later schemes.
Lewis took to social media – you might’ve seen this – saying that BNPL has become so common at online checkouts that it’s shocking it hasn’t been regulated until now. He’s been saying for years that while it can be useful, it’s being marketed as a lifestyle choice rather than debt.
People are getting lured into making impulse buys, even on takeaways, and then struggling with multiple repayments. And that can spiral into real trouble—debt collectors knocking and damaged credit files.
But it’s not all positive reactions. Labour MP Stella Creasy has raised concerns about the timeline, saying it could be another year before companies are properly regulated.
She’s pointed out that with Christmas just around the corner, it really can’t come soon enough. She’s calling for the government to act fast once the consultation wraps up, because people are being exploited in the meantime.”
Meanwhile, Klarna, the Swedish fintech giant, has reported significant growth in its UK operations, capitalizing on the booming demand for Buy Now, Pay Later (BNPL) services.
Over the past year, Klarna has increased its network of UK merchants by roughly a third, signaling strong consumer interest in alternative payment methods as the cost-of-living crisis persists.
Klarna revealed that its network of UK merchant partners has grown from around 30,000 in 2023 to 41,496 in 2024, marking a 33% increase.
Raji Behal, Klarna’s Head of Western, Southern Europe, UK & Ireland, noted, “We now enable one in every 10 British retailers. But we’re still only a fraction of credit card spend, so we’re excited for the next 10 years of continued growth.”
Reports from August suggest Klarna is in early talks with investors about a potential secondary share sale, as it prepares for a long-anticipated IPO.
Klarna’s push for profitability comes at a critical time, as its valuation plummeted from $45.6 billion in 2021 to $6.7 billion in 2022, following rising interest rates that spooked venture capital investors.
What you need to know
In 2022, 360 million people used BNPL services worldwide, with countries like the U.S., the U.K., and Australia leading in adoption. For example, 31% of Americans used BNPL in 2021, and over 17 million people in the U.K. used it, averaging 3.6 times a month according to Equifax.
While BNPL is traditionally used for higher-value items like fashion (41%) and electronics (32%), an increasing number of consumers (12-13%) are now using BNPL for everyday essentials such as groceries, toiletries, and even takeaways.
Young adults (aged 18-34) and higher-income households (£60k-£90k) are the most likely to use BNPL, with 55% of younger consumers having used the service at least once.
Nearly half (48%) of BNPL users report missing at least one payment, with many being hit with extra fees, which will soon appear in credit reports, further impacting consumers’ creditworthiness.
This trend is occurring against the backdrop of the ongoing cost-of-living crisis, making it more urgent to introduce regulatory safeguards.
Here’s a look at what BNPL looks like currently before regulation and how it will evolve after the new rules are implemented.
Today the lack of regulation means that BNPL providers are not required to obtain authorisation from the Financial Conduct Authority (FCA) or comply with the provisions of the Consumer Credit Act 1974 (CCA).
This freedom has led to a proliferation of BNPL offerings, with increasing adoption by consumers attracted by the simplicity, transparency and lack of interest charges.Merchants have also embraced BNPL, seeing it as a way to increase sales, improve customer experience and remain competitive.
However, this rapid growth has been accompanied by growing concerns about the risk of consumer detriment. The lack of robust credit checks, lack of transparency in credit reporting and the potential for over-indebtedness have prompted calls for regulation.
The upcoming BNPL regulation aims to create a more responsible and transparent market, with a focus on consumer protection.
The discussions around the regulation recognise that BNPL arrangements are lower risk than other forms of credit and takes a proportionate approach by tailoring regulatory controls to this level of risk.
This approach is reflected in the removal of certain pre-contractual provisions from the CCA (Consumer Credit Act ) and the introduction of more flexible FCA rules that are better suited to the BNPL business model.
The regulation will reportedly focus on BNPL arrangements offered by third-party lenders.
The regulation would exempt BNPL arrangements offered directly by merchants, thereby reducing the regulatory burden on small businesses and preserving access to useful financing options.
Specific exemptions would be maintained for insurance premium financing arrangements, employer-employee loans, and arrangements offered by registered social landlords to their tenants.
This targeted approach aims to avoid disrupting existing business models that have not raised significant consumer protection concerns.
Third party lenders will need to obtain authorisation from the FCA and comply with its rules. A temporary authorisation regime will facilitate the transition.
All advertising for BNPL will be subject to the financial promotion regime, requiring approval by an authorised person.
FCA rules will replace some of the CCA’s pre-contractual provisions, tailoring the requirements to BNPL. Small value BNPL agreements (less than £50) will be fully regulated.
The FCA will set rules on creditworthiness assessments and the inclusion of BNPL in credit files. The CCA’s requirements for arrears, defaults and defaults will apply. Consumers will benefit from Section 75 protection. Consumers will be able to contact the Financial Ombudsman Service.
Compared with traditional loans, BNPL loans generate less revenue for lenders as they are basically interest-free. But Buy Now Pay Later (BNPL) business models have proven profitable when bound with the right revenue streams.
There are multiple ways a BNPL app can make money. For example, predefined late payment charges, flat per transaction fee, merchant commission, and so on. Partnering with finance institutions and charging on payment through credit card, BNPL apps may earn an additional revenue.
Through BNPL, consumers gain access to credit, merchants benefit from increased sales, and BNPL service providers manage the risks and facilitate the payment process, in turn being rewarded with any kind of financial fee.
It is essential to analyze the impact of new regulations on the profitability and viability of the current business model. Adjustments may be necessary to compensate for increased compliance costs.
Key components of this model include consumers, who benefit from flexible payment terms; merchants, who partner with BNPL providers to boost sales by offering easy financing; and BNPL providers like Klarna, which earn revenue from merchant fees and, in some cases, late fees.
With impending regulations, the model may shift toward stricter credit checks and affordability assessments to protect consumers from over-indebtedness, while ensuring more transparent terms and handling disputes through regulatory bodies like the Financial Ombudsman Service.
This could increase operational costs for BNPL providers and slow down customer acquisition, but also strengthen consumer trust and sustainability in the long run.
TALK POINTS
These points are crafted to spark engaging discussions with your peers, helping you stay ahead of industry shifts, explore fresh perspectives, and drive informed decision-making in your professional circles. Whether you’re networking, meeting with partners, or leading your team, Talkpoints equips you with timely insights to elevate the conversation.
1. Market Dynamics: Increased Competition
The Buy Now, Pay Later (BNPL) sector is currently facing significant challenges as major players from the traditional banking and tech industries are entering the market.
Larger banks such as NatWest, Virgin Money, HSBC, and Monzo have launched BNPL products, leveraging their established credit card networks and sophisticated credit risk management systems. Additionally, tech giants like Apple, benefiting from its dominance in the digital wallet space, have quickly become key competitors in this field.
This influx of larger, well-resourced players is expected to intensify competition, likely driving down margins for existing BNPL providers. According to Grant Thornton UK, the presence of these new entrants “is putting pressure on market incumbents, particularly in terms of profitability.”
2. Investor Sentiment: Shift in Focus Toward Profitability
Investor confidence in the BNPL sector appears to be waning, despite recent reports of profitability from some providers. Klarna, for instance, has announced its first quarterly profit in four years. However, the majority of BNPL firms continue to operate at a loss.
A Moody’s report quoted by Grant Thornton UK raises concerns over investor patience: “After several years of losses, it remains unclear how long investors will continue backing these firms, especially given the higher costs of funding.”
Moody’s analysis suggests that firms need to shift their strategy from aggressive market share growth to prioritizing profitability. Echoing this sentiment, Klarna’s Chief Commercial Officer, David Sykes, stated: “It’s very clear that the markets are looking for something different now. It’s not about future growth; it’s about profitability today.”
This change in investor expectations presents a significant strategic challenge for BNPL firms, many of whom will need to reassess their business models to ensure long-term viability.
3. Regulatory and Market Pressures
The forthcoming regulations, designed to impose consistent industry standards, may increase compliance costs and pressure the sustainability of certain business models.
According to Grant Thornton UK, the introduction of similar regulations in the high-cost short-term credit (HCSTC) market in 2014 led to significant market exits, with 38% of providers exiting by 2016.
For BNPL firms, the impact could be similar. Some companies may choose to exit, others may seek acquisitions, and several may undergo substantial restructuring to adapt to regulatory requirements.
Those that remain will need to ensure operational resilience, sound internal controls, and a sustainable business model that can withstand both regulatory scrutiny and an increasingly competitive landscape.
The bottom line
The current consultation, ending in November 2024, will shape the final details of the regulation. Industry feedback, especially on key areas like affordability checks and disclosure requirements, will be crucial
In today’s high-inflation, high-interest-rate environment, consumers increasingly turn to BNPL as a means to balance their finances. The demand for flexible payment solutions is soaring, and digital businesses must be agile to capitalize on this trend.
BNPL is not without risks, including consumer debt accumulation and repayment defaults. These risks can affect both consumers and the company if not managed properly.
Strategic partnerships are essential for scaling and sustaining BNPL services. Many BNPL providers partner with financial institutions to spread risk, ensure funding, and leverage fintech innovation.
For businesses adopting BNPL, it’s vital to choose providers with strong financial backing.