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Providers of buy now, pay later services are set to feel the crunch as the UK’s financial watchdog tightens its regulatory focus on the fast-growing industry.
Merchants and lenders are set to take a combined hit of as much as £3bn following the regulation overhaul by the Financial Conduct Authority (FCA), according to its own projections.
The City watchdog is enforcing proportionate creditworthiness assessments for every transaction and making service providers subject to Consumer Duty. The new rules – which come into effect from July 15 – will make it a criminal offence to enter into a new agreement without the proper permissions or registration.
Consumers will also be able to take cases to the financial ombudsman, in a landmark change for the buy now, pay later (BNPL) sector.
Deferred payment credit lenders, a sector which include the likes of Klarna, Zilch and Clearpay, are projected to lose £1.4bn with the majority coming from £929m in lower transactions.
Meanwhile, on the merchant side, online retailers across consumer sectors will face an identical hit to profit. The likes of Amazon, ASOS and eBay are projected to lose £1.4bn from a dramatic reduction in transactions as customers face rejection for a loan or find the newly-regulated process too strenuous.
“We expect our regulation will reduce the number of transactions carried out compared to the baseline scenario,” the watchdog said.
“This may lead to reduced consumption than if deferred payment credit had otherwise remained unregulated.”
Regulate now, lose customers later
The FCA said the number of consumers using the services may fall due to no longer meeting the lending criteria or facing delays in being approved.
The remaining chunk of lenders’ hit is set to come from £243m lost in late fees – with the FCA projecting a fall in missed payments due to enhanced checks – and £204m in compliance costs.
“From an industry perspective, the challenge will be implementation,” Damien Burke, head of regulatory practice at Broadstone, said.
“Lenders will need to adapt systems, data and underwriting processes quickly, while maintaining the frictionless customer journeys that have driven BNPL’s popularity.”
The size of the BNPL market has expanded rapidly, reaching £13bn in the last year after hitting £60m in just 2017. This came amid rapid growth in the pandemic, with the service now making up roughly 10 per cent of all UK e-commerce.
Burke said the temporary permissions regime – a transitional bridge designed to help firms continue to operate legally while applying for full FCA authorisation – would “smooth” the transition, though warned those not already operating to the standard would find the process “demanding”.
An end to the ‘wild west’
Many of the UK’s fintech firms have called for greater industry regulation. Zilch has held a consumer credit licence from the watchdog since April 2020 and in 2023 became the first buy now, pay later firm to report to credit reference agencies.
A spokesperson for London-based Clearpay said: “Clearpay has always called for fit-for-purpose regulation that ensures consumer protection, provides much-needed innovation in consumer credit and supports the UK’s thriving FinTech sector.”
Titan of the BNPL industry Klarna – which has lobbied for greater regulation on the BNPL sector – landed an FCA electronic money institution licence last year as it sought to diversify away from its traditional BNPL offering.
The firm has set its sights on becoming a digital bank, but has faced steep costs in its ambitions. Since its IPO last September, the Swedish fintech’s stock has shed over 50 per cent.
A Klarna spokesperson said: “We’re finally in the home straight on BNPL regulation.”
The firm added it already offers regulated credit products and applies the “same approach” to its BNPL products.
“These new rules will raise standards across the market, give consumers clearer protections like Section 75 and make BNPL even more appealing to consumers.”
Klarna’s banking pivot came after the UK government announced a clamp down on the sector.
During her stint as City minister Emma Reynolds said “for too long [BNPL] has operated as a wild west – leaving customers exposed”.
The FCA said its new rules mark a proportionate approach to make sure BNPL can still be accessed by people if lending is sustainable.
Burke said: “For a product that is often positioned as a budgeting tool rather than credit, this regulatory reset is important in ensuring borrowers fully understand both the risks and the repayment obligations involved,”
Sarah Pritchard, deputy chief executive at the FCA, said: “We want the buy now pay later sector to thrive – it provides an important source of credit to many – and we will continue to support firms who want to develop innovative new products.
“But crucially, no-one should be lent to if they’re unable to repay because that could worsen their financial situation. Now Parliament has given us the powers, we’re putting in place proportionate protections for the 11m people who use it.”
