Regulating BNPL: What it means for merchants 

As it stands, the Buy Now, Pay Later (BNPL) market is almost completely unregulated. We have recently seen the UK Government postpone regulation plans following pressure from providers to water down its proposals. But draft laws published in February 2023, designed to protect consumers from rising debt attributed to the market, indicate a change. Many industry leaders have threatened to leave the UK, worrying that regulation will be costly and could even become impossible to manage. And it’s not just lenders that could be impacted, the proposed regulations may well put pressure on merchants too, with both left shouldering the financial implication.  

An unregulated market

Samantha Fogerty
Samantha Fogerty

Research shows that as of January 2024, half of UK adults have used BNPL and it’s likely to account for ten percent of ecommerce sales by the end of this year. BNPL has helped support retailers through the current cost of living crisis, but the lack of regulation is becoming difficult to ignore. BNPL loans have presented to some almost like free money, with no enforced FCA regulation meaning they don’t show up on credit files. This has enabled an extremely lax approval process, allowing consumers to slip under the radar, taking out multiple loans whilst defaulting on payments to others.  

This availability of easy credit without accountability has caused many consumers to end up in significant financial troubles, grappling with the burden of increasing debt. This is not to say we need to over-regulate, but there is a clear case for lending transparency to protect consumers.   

Proposed regulation 

The draft laws set out tighter advertising standards to ensure lenders aren’t misleading consumers. They will also allow consumers to make complaints to the Financial Ombudsman Service (FOS), instead of just directly to the lender. Additionally, customers will get powerful Section 75 protection on any purchases made through BNPL. Finally, the FCA will have the responsibility to make sure BNPL firms are following the rules. 

The reality of regulation 

The proposed regulation will mean bringing BNPL into consumer credit, which will have an impact on the retail sector. The process would mean any merchant offering BNPL would need FCA permissions. This would involve the merchants registering themselves as an Introducer Appointed Representative (IAR). This could be a challenge as the Consumer Credit Act 1974 was designed for the likes of mortgage brokers, actively selling finance to the customer who they were speaking to in real time. For BNPL, the merchant is simply referring customers from a website link, so going through all the extra detail of the onboarding process will become extremely challenging. Not to mention, having hundreds of thousands of merchants suddenly going through the FCA process would cause issues for the FCA itself. 

Alternatively, it could be that merchants would need to partner with a lender that is registered with the FCA instead, allowing them to sign off any financial promotions. Adverts promoting anything related to BNPL will automatically become a financial promotion (finprom), which isn’t currently the case. This would mean lenders having the responsibility of monitoring all their merchants’ ‘finproms’. Speaking from experience, this is the hardest part of being a lender with an IAR database. It means constantly monitoring content, making sure the correct disclaimers are used and they aren’t going outside permissions. Just imagine the impact on lenders with thousands of merchants. 

Proposed regulation will also see customers gain powerful Section 75 protection on purchases made using BNPL. With section 75 liability and an FOS charge of £750 per complaint case, this would add huge cost implications for unregulated BNPL giants.  

Lady shopping onlineImpact on consumer spending 

My assumption is that regulations coming into force will slow down customer usage of BNPL. I believe many customers were drawn to BNPL not just for its ease, but for the fact that it was not ‘credit’. I think those who need the service will continue to use it and those who are using it to make their disposable budget go a little further may think twice about the impact on credit scores. We don’t know how lenders are going to view BNPL usage and the effect it may have on assessing credit lines, this is something that only time will tell as regulations on the market tighten. 

A balanced solution 

It’s clear that regulatory changes come with challenges, but BNPL can’t stay how it is. Proportionate regulation would ensure customers are educated on BNPL risks and protected from falling into unmanageable debt. Filling the market with too much red tape is rightly alarming to merchants that have seen it as a lifeline during challenging economic times, but this is by no means the end of the road for the industry. While regulations could make onboarding processes more costly and elaborate for lenders, we should be looking for solutions to ethical and transparent payments. There’s opportunity to have regulation that supports the industry, ensuring costs aren’t passed onto already struggling retailers, at the same time as protecting the customer. These next 12 months will be telling, I hope to see government, industry and retail working together to deliver effective, yet realistic, regulation to protect the financial security of consumers.  

By Samantha Fogerty 

For a list of the sources used in this article, please contact the editor. 

Samantha Fogerty 

Samantha Fogerty is Chief Operating officer of Payl8r. Payl8r is a Buy Now, Pay Later firm offering ethical lending across retailers in the UK. Payl8r has pioneered a proprietary tech platform that underwrites customers at the point of sale using open banking, which is the first of its kind for retail finance. Since 2016, Payl8r has experienced a 334 percent increase in lending volume and doubled the work force each year. COO, Samantha Fogerty’s, partnership with CEO, Louis Alexander, has been pivotal to Payl8r’s success, enabling its rapid ascent in the fintech sector.