What does regulation mean for BNPL companies?

Buy-now-pay-later (BNPL) is a form of short-term financing that allows consumers to buy products without the need to front much (if any) of the payment upfront. Shoppers are able to spread the cost of their purchase over a period of weeks or months, usually without incurring interest or additional fees, providing they stick to their repayment plan.

Recently, BNPL business has boomed. But with the sector coming under increasing scrutiny from both UK and international regulators, what could regulation mean for BNPL companies?

What has driven the growth in BNPL adoption?

BNPL can be used as a free method to improve cash flow for smaller purchases, something that has seen the sector boom for consumers in the post-pandemic, tightening economy. In the last year alone, online purchases through BNPL increased by as much as 68% in the UK.

Growth is aided by the fact that BNPL can be more accessible than other methods of credit, as credit history typically doesn’t restrict consumers using BNPL.

For merchants, using BNPL allows access to a greater range of potential customers as it provides an opportunity to purchase for those who would not otherwise be able to buy their goods with a lump sum. Furthermore, the post-pandemic shift to e-commerce has hugely increased the popularity of payment plans.

Since the upward trajectory of interest in BNPL during the pandemic, investment in the sector has been tapered in recent times as result of macro economic conditions. This, of course, is a factor that has been felt across the broader fintech and tech ecosystems.

Despite tougher conditions for investment, popularity amongst consumers in the service has not waned, with recent results during the Black Friday week showing BNPL purchases increased by 78% between 19th - 25th November.

Buy-now-pay-later services have even begun to be used for supermarket purchases. In the UK, Iceland followed in the footsteps of supermarkets in Australia by bringing BNPL to their supermarkets.

As the cost-of-living crisis deepens over the coming winter, many may turn to BNPL for day-to-day purchases to aid cash flow. Trends suggest that as recession looms, the service may continue to become more popular as the finances of British households are pinched by soaring energy prices and inflation.

Will BNPL be regulated?

Buy-now-pay-later is not a fully regulated service, however the market is set for change as tighter regulation is developed.

In the UK, the FCA has warned BNPL firms about the promotion of their products. They warned that any marketing of their products must provide clarity around the risks of using BNPL, as well as the consequences of missing payments.

In Australia, the home of one of the largest BNPL providers, Afterpay, the wheels are already moving to begin regulating the service. This follows consumer groups' calls for BNPL to be regulated the same way as other credit services.

It is likely that as the UK and other regulating bodies will follow suit, the days of unregulated BNPL are coming to an end. In December, the European Council and the European Parliament reached an agreement to update consumer credit rules, including improving assessments of consumers’ ability to repay loans.

What could regulation mean for BNPL companies?

Although the future regulatory landscape is still not 100% clear, what we can say for certain is that the BNPL sector is under the microscope of regulators both in the UK and internationally.

This more focused regulatory lens will help offer more protection for the end consumer, which will ultimately increase trust and adoption in the offering. To get there however, as regulation begins to embed, the risk exposure for BNPL providers operating within the market is likely to increase. This increased regulation may also increase the barrier to entry for smaller retailers offering this service.

Europe’s fastest unicorn, Zilch, got ahead of the market by becoming the first regulated UK BNPL provider in 2021. We could see other providers following suit, even before the mandatory regulation comes into practice.

As regulation catches up with innovation within the market, this will have a positive impact on the trust and confidence of the product. For BNPL companies and merchants using the service, it will be essential to continue investing in change in order to keep up with the evolving guidelines and avoid ending up in hot water with regulators.

How can SuperscriptQ help?

SuperscriptQ can arrange the full suite of business insurance designed for companies operating in the BNPL market, making sure that your business is not unnecessarily exposed whilst providing a level of cover for regulatory investigation costs.

• SuperscriptQ offers a free health check of your insurance cover and we can provide recommendations, free of charge. No obligations. No strings attached
• We are a Lloyd’s broker - our access to over 60 insurers across the UK, Europe, Asian, Bermudan and American markets means we’re confident that we can make the most of current market competition to get your business the right cover at the best price
• If you are interested in working with us, we offer an end-to-end digital service which will streamline and simplify your insurance renewal process

SuperscriptQ supports high growth tech businesses who increasingly require bespoke insurance to protect themselves and enable continued growth, get in touch to find out more.

Justin Hurst is a Solutions Executive specialising in helping fintechs secure tailor made insurance, to ensure they are covered for the unique risks they face as they scale.

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