This article was first published in the Payment Methods Report 2023 by The Paypers, the Netherlands-based independent source of news and insights for professionals in the global payment and e-commerce community.
Buy Now, Pay Later (BNPL), the modern-day credit, quickly reached even the smallest segments of retail and the services industries over the past years. Today, the payment alternative is commonly used to cover daily necessities. While there is no BNPL regulation in place to date, imminent regulatory frameworks will most likely accelerate market consolidation and a slowdown in development. However, the impact is expected to be proportional to the extent of regulation.
Availability on purchases from daily essentials to B2B payments
After gaining significant traction during the global pandemic, BNPL continues to maintain its momentum as one of the leading trends in the realm of popular payment methods.
The BNPL market is estimated to grow by 14% year-on-year in 2023, to reach USD181 billion across 47 researched markets
Source: Euromonitor International
Traditionally, the payment alternative has focused on the retail segment – and, in particular, the financing of big-ticket items. In recent years, an increasing number of retailers have adopted BNPL as a payment option, and, today, consumers can apply instalment payments even on everyday purchases, such as groceries.
Instalment payment options help many to cover daily necessities amid an increasing cost of living, inflation, and rising interest rates. Moreover, BNPL has reached segments beyond retail and become prominent in service industries as well. Use cases include deferred or instalment payment options in the hospitality sector, as well as covering medical expenses. For instance, UK consumers increasingly turn to BNPL financing to access private medical care without the immediate financial strain of medical bills.
Beyond consumer use, BNPL is gaining traction in the B2B environment. Financial institutions recognise the potential of BNPL in the segment and are stepping forward to offer instalment payment options to businesses. For example, in early 2023, Santander launched a BNPL platform for multinational corporates, which claims to be the first of such global platforms. As BNPL has the potential to reshape commercial payments, we are likely to see more initiatives and product developments like Santander’s.
Delay in regulation amid increasing cost of living – opportunity or threat?
As consumer purchasing power declines and BNPL is more often used to cover the cost of daily necessities, concerns around debt accumulation are rising. The need to regulate short-term loans is becoming more pronounced than ever before.
To date, BNPL remains unregulated in most markets. The UK Treasury was among the first agencies worldwide to announce their intention to regulate the BNPL market, putting forth their plans in 2021. However, over two years have passed, and no regulation has been introduced by the Financial Conduct Agency (FCA).
It is argued that regulatory delay can be directly linked to the inflationary environment, and it is a result of the cost-of-living crisis in the UK. Payment plans give consumers access to products and services that otherwise would be beyond their means in the current economic environment. On the other hand, however, the heavy reliance on BNPL to pay for food, bills and everyday essentials risks creating a financial hole in which a large share of income goes towards past purchases. To avoid such an undesirable situation, most governments intend to regulate credit alternatives.
Therefore, BNPL regulation in the UK market is still considered to be imminent, with regulatory frameworks expected to be introduced by the EU soon too. Furthermore, in Australia, one of the world’s most developed BNPL markets, the government recently announced its intention to regulate and treat BNPL as credit. Thus, regulatory measures are anticipated to begin unfolding on a global scale over the next year or so.
Regulation to moderate BNPL growth and foster market consolidation
But how will regulation impact the landscape? While a slowdown in growth is anticipated, its magnitude depends on the level of regulation. Potential regulatory scenarios include underregulating the provision of BNPL, which holds the risk of unqualified consumers accessing too much credit. Conversely, overregulation might reduce the availability and attractiveness of BNPL for certain consumer groups. In this latter scenario, the cost of providing instalment payments is also expected to rise, which might be passed on to prices consumers pay for BNPL services.
As for the competitive landscape, the market has reached the consolidation phase, which is likely to be furthered by regulatory advancements
Source: Euromonitor International
Players are recalibrating their strategies, with a heightened focus on their core markets. A recent development of the BNPL landscape is Clearpay ceasing operations in France, Italy and Spain to prioritise its most profitable markets. Focusing on key geographies allows providers to become more robust and well established, competing more efficiently in an overcrowded landscape.
Another important consideration for BNPL providers is the need to comply with regulatory frameworks as early as possible. In 2022, Klarna began voluntarily reporting to UK credit agencies. This reporting helps increase consumer trust, and it also prepares pure BNPL providers to adapt to regulation swiftly. Moreover, it can empower fintechs to compete with greater efficiency against mainstream financial institutions, which traditionally have more experience with compliance than their fintech counterparts.
BNPL to face challenges in the future
Following the rapid expansion of BNPL payments, imminent regulation is anticipated to set back consumer BNPL use
Source: Euromonitor International
In the near future, the market will face continued challenges, such as ongoing interest rate hikes, margin pressures, and difficulty finding creditworthy individuals. In the long term, while BNPL is here to stay, credit assessment will inevitably become an important component of the BNPL landscape, reshaping the market by tightening access to the payment alternative.
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