The rise of Buy Now Pay Later and regulatory horizon

Deferred payment credit or ‘Buy Now Pay Later’ (BNPL) services in the UK have gained considerable traction, spurred on by the pandemic and the consumer shift toward more flexible spending. This article explores the current rise in BNPL and the upcoming regulatory framework and how businesses operating in this space will need to adapt.

The growth of BNPL in the UK

Over a third of UK shoppers have now used BNPL services to spread the costs of purchases, with fashion and electronics the most popular categories. 47% of users are millennials, followed by Gen-X, then Gen-Z. Factors such as convenience, affordability and zero interest have contributed to the payment option’s popularity.

Monthly active users for top BNPL apps have shot up 11% year-on-year (y/y) and total monthly downloads are up 19% y/y. A market model released in the first quarter of 2024 put the UK among the highest user rate in Europe for BNPL, and estimates that transaction values would be about 15% higher in 2024 than in 2023, and forecast to nearly double in 2029.

Retailers and e-commerce platforms have embraced BNPL to drive sales. The largest BNPL provider in the world with more than 85m active consumers, Klarna, has built on Apple Pay’s scale by announcing that its platform is now available online as well as in apps. This will allow Apple Pay users in the UK and US to split the cost of payments over three or four instalments. This move follows the relationship between the BNPL leader and big tech player solidified with Klarna becoming a reseller of Apple products, where US consumers can purchase Apple products using the payment options offered by Klarna.

According to The Global Payments Report 2024 - Worldpay, digital wallets are the most popular and the fastest-growing payment method globally, and during 2023 the number of contactless payments made in the UK increased to 18.3b payments, up from 17b. This is in part due to the continued growth in popularity of mobile contactless payment services such as Apple Pay and Google Pay. 42% of the adult population reported being registered for at least one mobile payment service in 2023, and of those registered for mobile payments, 98% of these people used the services to make payments during the year. Given the rise in use of these types of payments, there will be increased exposure for users of Apple Pay to have easy access to use Klarna’s new BNPL facilities.

Given the rise in popularity of this payment method, the risk of rising consumer debt, particularly amongst the younger demographics more actively using the facility and those with lower credit scores, is considerable. The Centre for Financial Capability, a UK based financial education charity, found that 22% of users have missed one or more repayments in the six months to December 2023 and nearly a quarter of loans charged late repayment fees.

Regulatory landscape for consumer protection

Given the growing concerns from consumer protection groups and lawmakers, on 17 October 2024, HM Treasury opened a consultation on the regulation of BNPL. The consultation outlines that lenders offering ‘deferred payment credit’ agreements are to be authorised by the Financial Conduct Authority (FCA) and be subject to ongoing supervision. Lenders will have to check that users are able to afford repayments before offering a loan and provided with clear information on the terms of the product. Additionally, financial promotions by unauthorised merchants will need to be approved by an authorised firm.

The legislative change will also afford consumers protection under FCA oversight, Financial Services and Markets Act 2000 and the consumer duty. It will also give users the option to raise complaints with the Financial Ombudsman Service.

The government’s aim is “to ensure people using BNPL products receive clear information, avoid unaffordable borrowing, and have strong rights when issues arise.” The consultation will close on 29 November 2024 and regulation pushed through 'urgently' and firms offering BNPL should consider the consultation and respond accordingly and ensure that they are prepared to adhere to the requirements set by FCA to achieve authorisation.

The objective to regulating the currently readily available BNPL credit option will not only enhance consumer protection but also lead to a shift in consumer behaviour - consumers take a more cautious approach to the product or are not deemed to qualify the affordability checks, then the regulated BNPL option may become more akin to other credit facilities and consumers may reconsider their options. Overall, this could result in increased competition within the credit ecosystem, with traditional lenders facing pressure to adopt more BNPL-like features, such as instalment payment options. BNPL providers will also face increased operating costs due to increased regulatory requirements, putting the smaller players at a disadvantage, so we could see some consolidation in the space.