The "wild west" of Buy Now Pay Later? By the time the Sheriff arrives, the market may have solved the problem

Yesterday the Government announced the next step in the torturously slow road to regulation of Buy Now Pay Later (BNPL), being the publication of draft legislation to bring BNPL under FCA regulation, with much of the detail still to be worked out by the FCA. City Minister Emma Reynolds said the new rules were designed to tackle a sense of “wild west” in the BNPL space. 

That’s possibly an odd metaphor, given that only three players now dominate the market - PayPal from the US, Klarna from Sweden with a planned NYSE listing currently on hold, and Clearpay which is part of Australia’s Afterpay.

Other firms that appeared to be challengers to the big three have either left the market (larger firms including Laybuy, OpenPay, and Zip) or are struggling to scale up (one exception being Bumper, the fast-growing sector specialist for car repairs).

Both PayPal and Klarna appear to have seen growth in the UK tailing off, suggesting the UK market for BNPL is reaching maturity much earlier than in other key BNPL markets including Australia, New Zealand and the USA.

The core problem faced by standalone BNPL providers in the UK market is that they are being squeezed.

For larger purchases, the UK’s very well-established Retail Point of Sale (POS) Finance market is more attractive for many consumers, with more affordable monthly payments even if interest is charged. The POS market has seen Barclays Partner withdraw from most lending for an unspecified period, but other firms have picked up Barclays’ retailer contracts, and there are new entrants specialising in sectors such as home improvements including green energy installations. 

For smaller purchases, the banks and large retailers are replicating BNPL-type functionality through adaptations to their existing credit card solutions, offering a combination of extended interest-free periods and repayments set out for individual purchase. The banks and retailers have the benefit of having a more in-depth understanding of their customers, helping them to avoid the growing cost of risk, as exemplified by Klarna's Q1 results also published yesterday. 

Meanwhile, what was originally the key revenue source for BNPL providers, being retailer subsidies, is disappearing as providers offer BNPL options for purchases from any retailer, not only those they have agreements with. It's partly for marketing reasons, to make their platform the one of choice to consumers. But it's also because the regulation will make it tricky to offer instant credit at checkout for new customers without requesting additional information. That makes BNPL less attractive to consumers and retailers compared to a one-time application.

The rapid growth of BNPL in the early years was in “wild west” territory, fuelled by the (mistaken, in my view, as I have covered previously) belief that the products were outside of FCA regulation because they were fixed sum arrangements for less than 12 months. From the outset, the BNPL business model has relied on customers using the product regularly. A substance over form view would be that BNPL is running account, not fixed sum credit. 

On that basis, the exemption that is now finally being removed might never have actually applied. Alternatively, it would have been a much easier path to regulation for the Government to simply clarify that existing running account regulation applies, rather than reinventing the (wagon - sorry!) wheel.

One way or another, the lack of regulation distorted the market. But just the prospect of more regulation has already improved lending standards. It also encouraged regulated POS finance providers, banks and large retailers to learn from the spectacular marketing successes of the BNPL providers, and launch their own similar solutions. By the time the Sheriff eventually arrives in town, the market could have already resolved the BNPL issues the Government wanted to fix. 

This analysis is based on my research for the latest Apex Insight market insight report, UK Retail finance 2025, shortly to be published.