Buy Now Pay Later

General Info

There are a range of different firms offering Buy Now Pay Later (BNPL) schemes; including catalogue credit, store cards or retailers. BNPL products allow shoppers to take out multiple agreements with different providers, making it relatively easy to accrue around £1,000 of debt that credit reference agencies and mainstream lenders cannot see. BNPL products and services has quadrupled last year to reach £2.7bn in the UK, making it the fastest growing online payment method in the UK, with 54% of millennials adopting BNPL schemes as opposed to traditional credit cards. Since the start of the pandemic around a third (33%) of the UK adult population have reported to have used some form of BNPL, with one in five (21%) being under 35 year olds. Generally in a single purchase shoppers tend to borrow around £65-£75, however, consumers can use several different BNPL schemes at different merchants without facing background or affordability checks. The BNPL market is set to carry on with this huge trajectory with the market predicted to be worth 40bn a year by 2026.

Current Market

The main competitors in the UK BNPL market include Klarna, PayPal, ClearPay and LayBuy, alongside other smaller competitors also operating in the ecommerce space. Recently online banking players have also expanded or are set to expand into the fast-growing BNPL market, including Monzo ‘Flex’ and Revolut, who have a product in the works. The Monzo ‘Flex’ scheme offers credit limits up to £3000 with repayment instalment periods of 3, 6 or 12 months (with the 3-month option being interest free). The major difference between normal BNPL schemes and Monzo Flex is soft credit checks are ran and approval is needed, which isn’t currently the case for the other major competitors in the UK market space, due to lax regulations.
Within the rapid global growth of the BNPL market, there have been increasingly large acquisitions of both up and coming regional BNPL companies, alongside more established BNPL by the larger fintech companies and competitors in an attempt to widen global outreach. For example, Square, an American Fintech giant acquired AfterPay in August 2021, one of the largest BNPL operators who serviced over 100,000 retailers globally during 2020. Similarly, PayPal acquired Japanese start-up Paidy at the beginning of September, in an attempt to strengthen their presence in the worlds 3rd largest eCommerce market. The latest acquisition being Australian BNPL player Zip investing into ZestMoney, an Indian Firm in an attempt to further expand their reach into the growing economy.

Current UK Regulations

Currently BNPL firms aren’t fully regulated by the FCA or any governing body within the UK, which has sparked up huge debates. If BNPL companies are to become regulated by the FCA, they will need to comply with ongoing regulatory requirements, which typically include affordability checks, credit limits, the right to complain to financial ombudsmen and fair treatment to those struggling to repay the loans. The FCA states in the Woolard Review that regulation of financial institutions such as BNPL firms is vital in order to create a healthy credit market, aiming to prevent harm whilst maximising the benefits of the markets for firms and consumers alike. However, whilst the government has announced BNPL schemes will be regulated by the FCA, there is still no clear date as to when these firms will become regulated, and as such firms are still operating unregulated, at the detriment of the public.

Benefits & Drawbacks

Whilst BNPL schemes have resulted in a huge boost to the fashion industry through staggered payments making the purchases more accessible for more of the population this has significant risks associated with it. On average, the UK consumer owes around £244.37 per person to a given BNPL player, which can highlight how many customers are buying beyond their means. 22% of buy now pay later users have had their credit scores negatively affected by their online shopping habits. However, if BNPL schemes are paid back on time and are not abused by the consumer, they have no harm on credit score and can often make previously unattainable products, accessible to a wider market, and thus boosting the economy.

Report written by Iona Diack – Research Consultant HAL Payments