Buy Now, Pay Later is now regulated in the UK. What does the future hold for the payment method?

Buy Now, Pay Later is a rapidly growing trend in a number of market sectors, including retail, entertainment and travel. During the COVID-19 pandemic, use of the payment scheme increased fourfold in the UK, to the tune of £2.7 billion in transactions. 

In this article, I'll give a brief overview of how BNPL works and the industries where it’s most prevalent, before discussing the recent regulatory changes that have been enacted and what they mean for the future of this popular payment method.

What is Buy Now, Pay Later?

Today, Buy Now, Pay Later is offered at the checkouts of a wide range of online retailers. Instead of paying outright for a product or service, customers choosing BNPL elect to spread their purchase over a series of interest-free instalments. The payment method is effectively a point-of-sale loan, with a soft credit check carried out during the checkout process.

Once a payment plan has been set up, merchants receive the total sale price up front, with the payment scheme provider collecting the instalments and receiving a cut for the transaction.

In Which Industries is BNPL Most Popular? 

Since COVID-19 forced many shoppers online, Buy Now, Pay Later has seen a surge in popularity across virtually every market segment. According to pymnts.com, the following categories derived the highest percentage of their sales from the payment method at the close of 2020:

• Clothing 63.5%

• Entertainment 30.3%

• Reading material 29.4%

• Household furnishing 28.7%

• Groceries 25%

• Food delivery services 21.8%

• Cleaning supplies 21.2%

• Automobile 19.9%

• Consumer electronics 17.5%

• Travel 17.4%

Why is Buy Now, Pay Later Popular Amongst End-Consumers?

In short, consumers are always going to be drawn to cheap and easy methods of accessing credit. Detractors are quick to point out the downsides and negative public opinion surrounding point-of-sale loans, but the payment method is now very well established and almost definitely here to stay. Recent research from ECOMMPAY found that three-quarters of UK businesses expect BNPL use to increase as the cost of living rises. 

As disposable incomes shrink, Buy Now, Pay Later schemes are unfortunately becoming popular by necessity, with 93% of those surveyed in the finance sector expecting consumers to increasingly rely on instalment-based credit in the future — a sentiment that's shared by many other industries, including retail, travel and aviation.

Who currently offers Buy Now Pay Later as a payment option?

In the UK, the internet shopping service Klarna was instrumental in bringing BNPL to the mainstream. However, these days, as well as fintech platforms such as Revolut, many of the online world's biggest players are now offering their own take on the payment method:

• Apple Pay Later

• Amazon (in partnership with Barclays Instalments)

• PayPal Pay-in-3

How BNPL is Regulated Around the World

BNPL regulation varies tremendously from country to country, with certain regions enforcing much stricter regulations than others. Overall, worldwide sentiment towards Buy Now, Pay Later leans toward the attitude that it should be better regulated, though many countries haven't yet pushed through laws to make that happen.

Here's a brief overview of the levels of legislation currently present in the EU, USA, and here in the UK: 

The European Union

The EU Commission published a proposal to revise the law on consumer credit agreements in June 2021. The directive isn't quite finalised but will bring previously excluded point-of-sale loans within the scope of regulation, requiring more information to be given to consumers before they enter into a Buy Now, Pay Later agreement.

EU rules on consumer credit can be found here for those interested in the fine details, but I should point out that consumer credit is also regulated at a member-state level, so there will be discrepancies across the region as a whole.

The USA

Buy Now, Pay Later isn't currently regulated to any great extent in the USA. That's mainly because the short-term nature of the schemes usually fall outside regulations covering traditional loans. The Consumer Financial Protection Bureau (CFPB) has issued recommendations on the subject of BNPL, as well as outlining the potential consumer risk, but the government hasn't yet moved beyond the investigatory stage.

The UK

After many months of negative press surrounding the issue, the UK government has finally brought in legislation to regulate interest-free Buy Now, Pay Later schemes. The laws have been introduced to offer better consumer protection, forcing lenders to ensure that loans can feasibly be paid off by consumers and that advertisements for easy lines of credit are not misleading.  

But now the government has finally responded to the need for proper legislation, what does this mean for eCommerce retailers and other industries offering BNPL to customers? 

If Businesses Tread Carefully, BNPL is Still an Attractive Option

Although regulation has taken a long time to arrive and has been met with sharp criticism, many companies broadly favour tighter legislation to protect vulnerable consumers. In fact, the interest surrounding Buy Now, Pay Later and the vocal calls for regulation mean that the payment method is well-established in the mainstream consciousness, and is almost definitely here to stay.

For merchants, BNPL can be an attractive payment option to offer to consumers, as it affords a certain element of security, with providers collecting instalments from end-users and the merchant receiving the total sum up-front. Add to that the potential for customers to buy higher-ticket items than they would without credit, and the advantages are clear to see.

However, in light of recent legislation, any business seeking to introduce BNPL to its range of checkout options will need to tread carefully and ensure the following components are satisfied:

• Companies will need to consider how they handle pre-sales and customer engagement.

• Customer payment flows need to be smooth, making it easy to set up payment plans.

• Post-sales experiences must also be considered, nurturing customers and building trust.

• Most importantly, companies must carry out comprehensive checks to ensure consumers can keep up with repayments.

But Now, Pay Later is Here to Stay 

Despite the headaches of dealing with government legislation, regulation of the Buy Now, Pay Later landscape is long overdue and broadly welcomed by the retail sector. As some of the world's largest corporations begin to offer their take on BNPL, the payment method is now firmly entrenched in mainstream consciousness and remains an attractive checkout option for businesses prepared to stick closely to government guidelines.