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.
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. According to Euromonitor International data, the BNPL market grew by 9% year-on-year in 2022, reaching USD 156 billion across 47 researched markets.
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 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 increasing cost-of-living, inflation, and rising interest rates. Moreover, BNPL has reached segments beyond retail and became 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.
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.
Source: Euromonitor Voice of the Consumer: Lifestyle Survey, fielded January to February 2023
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 European Union soon too. Furthermore, in Australia, one of the world’s most developed BNPL markets, the government recently announced their 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.
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. 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, who traditionally have more experience with compliance than their fintech counterparts.
Following the rapid expansion of BNPL payments, imminent regulation is anticipated to set back consumer BNPL use. In the near future, the market will face continued challenges, such as ongoing interest rate hikes, margin pressures, and difficulty finding creditworthy individuals. On 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.
This editorial piece was first published in the Payment Methods Report 2023, which provides an in-depth overview of the latest worldwide developments in how people pay, the payment methods space, the innovative technologies that these methods work upon, and the best strategies on how to win at conversion and retention.
Frida is a Consultant at Euromonitor International with a focus on consumer finance. Based in London, Frida conducts and commissions research for consumer payments and lending in Western Europe. She produces analyses on payment and financial service trends and advises clients across a range of industries.
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