Key facts
- New UK buy now, pay later regulations take effect July 15, bringing the sector under FCA oversight.
- The UK BNPL market has grown to £13bn, with an estimated £3bn impact from new rules.
- Providers face £1.4bn in costs from lost profits and compliance, including £929m from tougher credit checks.
- Revenue from late fees is expected to fall by £243m.
- Up to 30% of BNPL users could be excluded due to stricter affordability checks.
- Industry leaders Klarna, Zilch, and Clearpay support the new regulations.
The UK's buy now, pay later (BNPL) market is set to undergo a significant transformation as new regulations from the Financial Conduct Authority (FCA) come into effect on July 15. This regulatory overhaul, five years in the making, aims to address financial risks identified in an industry review concerning the ease of consumer borrowing.
The market has experienced substantial growth, ballooning from £60m in 2017 to £13bn in the past year, according to Treasury data. Industry veterans like Klarna, Zilch, and Clearpay, while acknowledging the substantial costs associated with compliance, are largely welcoming the new framework. Damien Burke, senior director of regulatory practice at Broadstone, estimates the total bill for BNPL providers to be £1.4bn, comprising £929m in lost profits due to stricter creditworthiness checks and £204m in direct compliance costs. Revenue from late fees is also projected to decrease by £243m as improved affordability checks reduce missed payments.
These stricter checks are expected to introduce friction into the borrowing process, potentially leading to a reduction in transaction volumes. Retailers such as Asos, Boohoo, Argos, and Curry could feel the impact as consumers may abandon purchases due to increased scrutiny. Fair4All Finance projects that up to 30% of the nearly 11 million UK BNPL users could be excluded by these new affordability requirements.
Despite the financial implications, major players like Klarna, Zilch, and Clearpay have expressed optimism. Klarna views robust regulation as beneficial for consumer confidence and protection. Zilch co-founder Philip Belamant described the framework as a "significant moment," while Clearpay anticipates a more consistent operating environment. Prior to these rules, only Zilch held full authorization as a credit lender. Clearpay highlights its 'safe by design' system with immediate suspensions for missed payments and capped late fees, while Klarna asserts it already operates within a regulated sphere through credit checks and data sharing.
The new protocol mandates more thorough financial assessments, requiring firms to examine consumers' incomes, spending habits, and existing debts. Furthermore, senior managers will be held individually accountable under the watchdog's regime. Smaller fintech companies are expected to bear the heaviest burden due to limited resources, potentially leading to market exits and consolidation. Zoe Morton, consulting director at RSM UK, suggests this could create opportunities for traditional lenders and neobanks, such as Natwest, Lloyds, Monzo, and Revolut, to expand their presence in the BNPL space.