What next for BNPL?

Buy-now pay-later is heading into uncertain terrain.

Prior to being elected, Labour signalled its intention to tighten up the law as it applies to this unregulated niche of financial services, unhappy with the fact that a third of such loans are not paid off at the end of the term and 20% of borrowers miss payments. And true to its word, within days of taking over the incoming government announced that the fast-growing sector would be subject to full FCA oversight.

Consultation on its proposals has just closed with the expectation that a new regulatory regime will be in place for BNPL some time in 2025. Key elements of the new regime have already been announced and look certain to be enacted in some form. These are affordability checks for all BNPL agreements; ‘section 75’ protection on purchases, meaning that the BNPL providers will be jointly liable with the retailer; application of the FCA’s existing toolkit; and allowing users to take complaints to the Financial Ombudsman Service.

Most tellingly, the above will mean that many firms providing interest-free delayed-payment benefits will no longer get an exemption found under Article 60F of the Financial Services & Markets Act, where no interest is charged and there are 12 or fewer instalments. Removal of the 60F exemption will mean FCA authorisation and consumer agreements strictly in line with the Consumer Credit Act.

To some, the above has unwelcome echoes of what happened to payday lending. They see uncomfortable similarities between the two. As with BNPL, payday lending boomed while unregulated, but crashed spectacularly when brought within the oversight of the FCA and became subject to mis-selling claims. Could this be what is in store for BNPL?

There is certainly a risk. We are all familiar with how this small niche of financial services has grown to become a highly successful adjunct to the sales process. From next to nothing in the UK a decade ago, to 26.4m people in 2024 having used BNPL, or 36% of the population.

Undoubtedly part of its success has been the red-tape and regulation-free environment that has allowed it to flourish. Perhaps the sole reason for its rise has been the friction-free application process that, thanks to technology, has been stripped down to a few clicks. At the point of sale, either online or in-store, the consumer can opt to spread their payments over several months often for no cost.

The introduction of affordability screening for what are high-volume low-value purchases seems by its very nature to be overkill. Given that the decision to take out such a loan comes at a very time-sensitive stage (the moment consumers are poised to make the purchase), it will unavoidably make the transaction more prone to consumer cancellation. And, from the lender’s perspective, it may simply not be worth the risk of engaging when such loans are liable to the Financial Ombudsman complaint service and its high case fees. Everyone is aware of the way PPI and payday lending morphed into an ambulance-chasing fiasco thanks to the UK’s army of no-win no-fee claims chasers. Lenders have much better things to do with their limited resources than defend a tidal wave of mis-selling claims, each with a potential circa £500 admin fee win or lose.

Such added risk is likely to make the sector unattractive to future and existing lenders. They do not have to invest in BNPL and cannot be blamed for placing their money where they will get a more predictable return. The UK will be one of only a few countries heavily regulating this area of finance, multinational BNPL fintechs might choose to focus their efforts on jurisdictions less prone to ‘over-regulation’. Perhaps NatWest’s ditching of its BNPL operation earlier this year is a portent of things to come. However, there is room for hope.

The government – perhaps aware of dangers of regulatory overkill given what happened to payday – says it wants to introduce regulation that is proportionate to the risks. Furthermore, it wants the regulations to ‘provide the certainty [to BNPL providers] to innovate and grow’.

Significantly, it looks like merchant-provided credit agreements, such as those directly offered by sellers, will remain exempt under the current proposals. This caveat is based on the view that such credit agreements pose a considerably lower risk to the consumer.

There has certainly been lobbying from the major BNPL lenders, to help inform policymakers. Clearpay’s Michael Saadat says that civil servants ‘have listened to industry feedback and evolved the previous framework to ensure a more proportionate approach to regulation’. Clearpay is counting on ‘fit-for-purpose regulation that prioritises customer protection, and delivers much-needed innovation in consumer credit that sets high industry standards across the board.’

Elsewhere, Klarna’s founder and CEO Sebastian Siemiatkowski has even congratulated chief economic secretary of HM Treasury Tulip Siddiq for ‘moving quickly to regulate’. ‘They [Labour] have been working with the industry and consumer groups long before coming into office. We’re looking forward to carrying on that work to put proportionate rules in place that protect consumers while fostering growth,’ he adds.

There can only be a few months now before we know whether this optimism is misplaced. Let us hope it is not. Technology, which to a large extent has fuelled the growth of BNPL so far, has its limitations. Even automated decisioning with its ability to rapidly onboard prospects entails some degree of extra friction as compared to unregulated lending.

David Wylie is the Commercial Director of LendingMetrics