The evolution of BNPL

With Monzo and Affirm announcing they will be rolling out new ’Buy Now Pay Later’ features with Apple Pay Eddie Flanagan and Caroline Mattin at Shakespeare Martineau explore what impact this could have on the market

The Buy Now, Pay Later (BNPL) sector has seen exponential growth in recent times, evolving from a niche payment option in 2010 to a mainstream financial service today.  Consumers’ spending habits have changed and with that the demand for flexible payment options have increased with the likes of Klarna and Monzo offering much sought after solutions as alternatives to traditional credit options. 

The evolution of BNPL

So where did it all begin? Initially, back in 2010, the core focus for BNPL products was in the fashion and electronics industries with BNPL services primarily offered by fintech companies like Klarna and Afterpay. The start-ups had identified new repayment options which allowed consumers to spread their purchases over several instalments, interest free. Proving so popular, the sector quickly evolved with more and more providers entering the market offering multiple payment options at checkout for online retailers.

The COVID pandemic further cemented the desirability of flexible financing with online retail becoming the main way of shopping for millions of people almost overnight. Not wanting to be left behind, major credit names like Visa and Mastercard threw their caps in the BNPL ring allowing consumers to take advantage of BNPL options at a much wider range of merchants than ever before. 

Favoured by Millennials, BNPL has seen widespread adoption within this demographic because of its similarity to credit cards but without the hassle of navigating application processes, card-swiping/tapping infrastructure and credit limits on cash and withdrawals and purchases. For many, BNPL makes life simple.  

An innovation success story of note but not without its issues. With the increase in take up came the increase in fears over escalating consumer debt and exploitation of the vulnerable attracting the scrutiny of the regulators.

Concerns abound that BNPL normalises debt with criticisms that it provides a false sense of financial security which could lead to impulse shopping with consumers spending more money than they have. An example being that this process is now used for recreational spend such as takaways. When consumers default on payments, late fees are charged with persistently delinquent accounts sold to debt collection agencies. 

On the converse, some commentators say that the levels of individual BNPL debt are low and that consumers, once slapped with a late payment charge, learn their lesson and do not make the same mistake again.

Current state of BNPL regulation

While it is fair to say that BNPL itself is not regulated, many elements of the products and services and communications around them are regulated. The Financial Conduct Authority (FCA) has been working to bring BNPL products and providers under its regulatory umbrella for some time but doing so in a piecemeal fashion. 

The FCA’s consumer duty is also putting a spotlight on some BNPL providers who support a degree of regulation and who are keen to ensure good outcomes for consumers while protecting them from unsustainable borrowing in the light of the rising cost of living. The broader consumer protection legislation which exists provides some protections to consumers. For example, the FCA has rules and guidance on advertising and financial promotion.

BNPL firms must adhere to these consumer focussed rules to ensure that they are not misleading, and that is to the benefit of consumers, not their detriment.

UK government’s approach

The UK’s Labour government confirmed its commitment to regulating the BNPL sector with Economic Secretary, Tulip Siddiq, stating that regulation of the sector is an area of focus for her and the new government. The detail and timings of any proposed regulation remains unknown but would likely cover bringing BNPL providers into the FCA’s fold, requiring them to apply for authorisation to sell BNPL products in the market.

 It isn’t immediately clear whether Labour’s intention is to resurrect all or parts of the former government’s proposals, which met with a degree of resistance from the sector and increased concerns that BNPL providers would pull out of the UK market for fear of overly stringent regulatory oversight.

So far, the only guidance we have from the Labour Government comes from a short paragraph in its January 2024 ‘Financing Growth’ paper where it stated that building on conversations with the sector it had laid out a plan for regulation which had received broad support from the sector and could be implemented quickly to better protect consumers and provide certainty for BNPL providers.

Any further commentary has been high level and seeking to focus on the core Consumer Duty principles, namely the delivery or good outcomes for consumers, access to clear communication, protection of the vulnerable and protections for consumers if something goes wrong balanced with the need to ensure proportionate regulation so as not to stifle innovation. Nothing concrete, yet.

Perhaps the Consumer Duty and a flexible approach to regulation is what is needed to balance consumer protection with much sought-after financial innovation in the UK which can help consumers manage their day-to-day expenses.

Potential impact of over-regulation

While regulation is necessary to protect consumers, there is a fine line between adequate oversight and over-regulation. Excessive regulation can stifle innovation and limit consumer choice. On one hand, strict rules could increase operational costs for BNPL providers, which may be passed on to consumers in the form of higher fees or interest rates.

Additionally, over-regulation could reduce competition by creating barriers to entry for new players, ultimately leading to less choice and higher prices for consumers.

The latest developments: Monzo and Affirm

Recently, Monzo and Affirm have announced new BNPL features integrated with Apple Pay for users in the UK. Monzo’s Flex credit card now allows users to spread their payments over several months directly at checkout, providing a seamless and flexible payment experience. Affirm is expanding its BNPL services to Apple Pay users in the US, offering biweekly or monthly payment options with transparent terms and no hidden fees. 

These developments and integrations demonstrate the growing significance and importance of BNPL services in the global payments ecosystem. They also underscore the need for balanced regulation that protects consumers while fostering financial innovation.

Developments at pace

The BNPL sector is developing at pace and as it continues to evolve, finding the right balance between regulation and innovation will be key to ensuring its sustainable growth. A light touch regulation backed by the requirements for financial services firm to adhere to the Consumer Duty is potentially the answer.

Whichever way the Government decides to go, the Consumer Duty will be key and BNPL providers should familiarise themselves with it now while we await further details from the new government with bated breath.

Eddie Flanagan is a Partner at Shakespeare Martineau and Caroline Mattin is a Lawyer at Shakespeare Martineau

Main image courtesy of iStockPhoto.com and B4LLS