After being continually shelved over the past several years, the new Labour government intends to get the ball back rolling on plans to regulate the UK Buy Now, Pay Later (BNPL) sector.
There have been many conflicting views on how to regulate BNPL. Should it adopt similar rules that credit cards and issuers abide by? Or should policymakers look to update existing regulations to accommodate BNPL for both operator and customer?
Iana Vidal, Director of Public Policy and Regulatory Affairs at leading UK BNPL provider Clearpay, spoke to Payment Expert on why the UK should not look to rely on old rules to regulate BNPL and what the country can learn from the imminent regulations being introduced in New Zealand and Australia.
Payment Expert: Firstly Iana, how has BNPL usage changed since its major growth period in 2021? Do consumers still use it as much today?
It is well reported that BNPL adoption rose during the pandemic. Since then, BNPL usage has continued to rise alongside the growth of e-commerce.
Worldwide spending on BNPL purchases grew 18% last year to hit $316bn, according to a report from Worldpay. From a UK perspective, Adobe Analytics reported that UK consumers used BNPL to finance £1.22bn worth of purchases in May 2024, representing 15.4% of total online spend.
Furthermore, Gross Merchandise Value (GMV) from our BNPL platform was $6.98bn in Q1’24, an increase of 25% year over year.
BNPL has become a mainstream payment method and Clearpay is expanding into verticals beyond fashion and beauty, such as homewares (John Lewis, The Range), hobbies (The Golf Factory, Create and Craft) and travel (Alternative Airlines, National Express).
Payment Expert: Could you outline some of the key talking points from the UK government’s consultation into regulating the country’s BNPL sector that ended last April?
The process of developing a regulatory framework for BNPL has laid bare the challenge of trying to apply decades old rules to new fintech products.
Last year’s proposals from HM Treasury sought to apply the Consumer Credit Act (CCA) to the BNPL model. The CCA was passed in 1974, making it 50 years old this year. It does not take into consideration the 21st century technology that powers BNPL, nor the smartphones that the majority of consumers use to manage their money today.
The proposed rules squeeze BNPL – which is neither a credit card nor a fixed sum loan, but rather something in the middle – into one of these two categories. This results in the potential for perverse consumer outcomes. For instance, mandating the presentation of pre-contractual information that does not apply to Clearpay, such as loan interest, or sending key notices about payment defaults after the transaction has concluded.
The proposals also sought to regulate BNPL credit offered by third parties only – leaving BNPL provided directly by retailers out of scope. This is a missed opportunity to provide comprehensive consumer protection, especially as BNPL offered by retailers themselves is continuing to grow.
Any protections must apply to the entire industry, otherwise this will potentially harm and confuse consumers. It also risks creating an unlevel playing field in the market, and will put innovative fintech businesses at a competitive disadvantage.
Payment Expert: Are there any countries the UK can look as reference for an established BNPL regulatory framework and why?
There have been important developments in New Zealand and Australia in relation to BNPL regulation.
New Zealand will be the world’s first jurisdiction to see a BNPL-specific regulatory framework go live this September. Last year, the former Labour government created new regulations that brought BNPL within New Zealand’s equivalent of the CCA. This will see the implementation of a tailored approach, providing consumers with a range of key protections without hindering innovation.
In Australia, the government is in the process of regulating BNPL, with legislation published in June. Providers will be required to hold a credit licence and introduce appropriate credit checks for consumers. Importantly, the legislation will establish a new category of ‘low‑cost credit’ within Australia’s equivalent of the UK CCA to reflect the lower risk and cost of BNPL, compared with other regulated forms of credit.
This is an important step as it has allowed the government in Australia to tailor the regulatory regime to fit the actual product. It provides a better outcome for the consumer because the rules are geared towards delivering a positive experience for them while using the specific BNPL product, rather than applying generic credit rules.
There is a historic opportunity to encourage countries with very similar legal systems to align their approaches to BNPL regulation. Australia and New Zealand have created a strong precedent that many other countries should look to as they develop their own frameworks
Initiatives such as the Australia and UK Free Trade Agreement provide an opportunity for regulatory dialogue and cooperation in financial services between markets, to explore mutual learning and sharing of best practice.
Payment Expert: How important is it that key players, such as yourself and Klarna, are engaging in regulatory talks with policymakers and how fruitful has this process been?
One reason why the New Zealand and Australia approaches have been successful is due to open and transparent dialogue between the government, regulators and industry.
In Australia, this process has been helped by the world-first industry code of practice for BNPL that Afterpay (known as Clearpay in the UK) developed as a founding member in 2021. The code set out standards that key industry players signed up to, and the government has used this as a framework on which to build the regulatory regime.
It demonstrates what can be achieved when key stakeholders come together to tackle these regulatory challenges, especially as it relates to new, emerging technologies that don’t neatly fit into legacy frameworks. We hope the UK will take a similar approach under the new government in tailoring a proportionate regulatory regime for BNPL.
Payment Expert: Lastly Iana, and thank you for your time, why is it fundamental for BNPL to have a regulatory framework that does not impede innovation and growth for the sector?
BNPL is an innovation that is providing millions of UK customers with an alternative to high-cost, interest-bearing credit that is often confusing, lacks transparency and can trap them in a cycle of harmful debt.
We firmly believe that regulation must be applied and we are passionate about the need for high standards of consumer protection. However, it is important to achieve this without relying on outdated rules.
We see the value in applying a very limited number of CCA rules, such as Section 75 payment protection for BNPL purchases and access to the Financial Ombudsman Service for BNPL customers when things go wrong. But other measures in the CCA are not tailored to BNPL and run counter to the way BNPL products are designed and consumers interact with them.
Rather than applying the rigid and prescriptive CCA, some rules within the FCA’s Consumer Credit Handbook, Consumer Duty and other FCA principles can be applied. This can deliver a tailored approach that can achieve good outcomes for consumers.
Approaching regulation in this way has the added value of being flexible and future proof. These higher level rules that sit with the FCA would be more readily adaptable as the market changes, and the lack of prescription means that firms can tailor their product offerings to the way that suits their customers best.
We are encouraged by the new government’s willingness to build a robust regulatory framework for BNPL that is fit for the future, and we will continue to support the government and industry as regulation is delivered.
