BNPL – Do the Regulations Matter?

By Paul Marcantonio, Executive Director UK & Western Europe, Ecommpay

Buy now, pay later (BNPL) has been a popular payment service for a while now in the UK, with Ecommpay data showing that 27% of consumers were already using the payment option by late 2022, while a third of consumers would remove items at checkout if the service was not offered. Indeed the ability to split payments into more manageable chunks, has been appealing across age ranges, markets and businesses, especially as the cost of living increases. 

However, BNPL has recently been under scrutiny by the UK government as it seeks to iron out the kinks that arose with the previously unregulated credit service. The UK has published a new draft legislation to introduce regulations with the technology which should put the minds of those worried about overspending and debt at ease and enforce tighter credit checks from lenders. BNPL success is contingent on safe consumers and responsible lending, therefore regulations on both sides should provide a more attractive use-case for the payment service.

BNPL Usage Insights and Data

According to Ecommpay’s data, over 40% of both Millennials (41%) and Gen Z (46%) said they were more likely to use BNPL for their holiday purchases last Christmas and in turn continue to be the focus of lenders. Almost a third of 35-44 year olds (30%) responded similarly, showing that the payment option was already a popular choice among a wide age group.

However, one key aspect of the technology that had put off many from using it was its unregulated nature. All borrowing involves risk, but if there are no regulations, consumers and businesses tend to steer away from such methods of payments so as to avoid financial trouble and ultimately loss of capital.

In 2022, 51% of business leaders thought further regulations would lead to an increase in the use of BNPL. This drove a push for regulations enacted earlier this year in the sector which have shifted the rules when it comes to the technology use and distribution.

UK Draft Legislation for BNPL Industry

The introduction of this proposal would mean that the Financial Conduct Authority (FCA) would keep a close eye on both lenders and customers, helping to provide further stability. For lenders, failure to conduct adequate credit checks on potential BNPL customers may result in fines or lending bans by the FCA. On the consumer side, the legislation allows a layer of protection previously not available as BNPL providers would now be held to the same standards as traditional lenders. This would mean that consumer complaints could go directly to the Financial Ombudsman Service (FOS) to be rectified, something that was not previously available.

Outside of the actual service being used, BNPL providers will be under further scrutiny from this legislation when it comes to advertising their BNPL products. In 2022, the FCA warned BNPL firms that promotions must be clear, fair and not misleading – something that will be enforced should the legislation be put forward.

These changes are for the most part positive, but only time will tell whether this deters consumers and payment service providers from using and providing the service respectively. In 2022, ECOMMPAY found that 37% of consumers were more encouraged to use BNPL given the new regulations set in place then. New regulations should therefore reassure consumers looking at using the credit option.

BNPL Advertising and Regulatory Impact

While we await regulation day, with HM treasury seeking to lay legislation later this year, the market continues to innovate. Newer and more innovative financial models are continuously being developed and this is no doubt a sign of things to come.

The idea of BNPL 2.0 has been put forward, which would attempt to mitigate risk factors, adhere to current regulations while being future-proof, and for some lenders, increase the range for which the service is available. Being able to use BNPL to spread the cost of purchases up to £30,000 may very well set a precedent which may lead to the use of the service within Business-to-Business (B2B) to be more prevalent. 

Ethics and Morality in BNPL Services

With new payment systems, it’s important to remember the moral and ethical side. Evaluating both the consumer and the lender is the first step in ensuring safety and risk aversion. Lenders must provide all the essential information to their consumers to ensure they are using their services with all the knowledge they need. With greater safety, both businesses and consumers may feel more protected when using BNPL services and the use cases for it proliferate across industries, appealing to a wider demographic.

Similar to other now well-established payment services like mobile wallets, contactless and SWIFT, BNPL is a payment service that will continue to grow and develop, all in a push to provide the best service for the user. Added regulations provide further validity for its use, which ultimately means a safer way to manage your money, especially during times of economic strain.