Adoption of buy-now-pay-later services is predicted to surge to more than 900 million users around the world by 2027, but the regulatory oversight of this growing industry leaves much to be desired, argues Corlytics founder and CEO John Byrne, who considers whether a new UK rule could set a worldwide baseline.
Buy-now-pay-later (BNPL) services like Klarna are no longer flashy, new fintech innovations; they have become the new normal for millions of users across the globe. The uptake in usage of BNPL services marks a significant shift in how consumers finance everyday items.
BNPL is reshaping consumer credit, quickly becoming a mainstream form of credit that operates outside of a traditional regulatory framework. Worldwide, companies are rapidly adopting BNPL methods of payment.
Despite the mass adoption, many countries have not yet regulated the fast-growing industry, projected to reach more than 900 million users in the next couple of years, exposing consumers to unmitigated credit risks.
Without a legal structure to protect user rights, consumers may fall into debt traps, where they are unable to pay off their debt in time and are charged high late fees. A recent LendingTree survey indicated that more than two in five BNPL borrowers paid late in the past year. Additionally, without regulations, people are unable to report misconduct or fraud, as they would with other financial institutions or regulated financial products.
The absence of regulation allows BNPL providers to operate without much consequence; the consequences are borne by the consumers, particularly those without access to traditional credit.
BNPL & financial vulnerability
Despite the convenience and momentary financial freedom of BNPL models, the impact on credit scores may introduce systemic vulnerabilities that can extend to the housing market. For instance, evidence indicates that using BNPL services may impact a person’s ability to get a mortgage by lowering their credit score. This may create systemic risk, with a housing crash that could devastate the market.
While the most purchased items with BNPL are clothing and shoes, according to LendingTree’s survey, a quarter of BNPL users rely on it for groceries, which is a signal of deeper macroeconomic strain, not the frivolity of consumer behavior.
This data is concerning for multiple reasons. First, consumers receive no return on investment for essential goods or luxury items. Without an opportunity for profit, many will struggle to escape debt and will be forced to continue relying on BNPL services to make ends meet. Second, the increased use of BNPL services likely indicates rising consumer stress, which may be worsened by inflation and slow income growth, as predicted by Morgan Stanley. This is a concerning predictor for the market at large, which will suffer from increased consumer stress.
Access to credit can be empowering if the credit is aligned with transparent, consumer-first practices. Significant evidence suggests that communities in the Global South benefit from microloans, particularly when provided to women, who are more likely to spend the money on their families or investments.
The difference between microfinance and BNPL is that BNPL lacks transparency. The BNPL model aligns provider incentives with consumer delinquency, an inversion of responsible lending principles. These models rely on late fees, which creates an irresponsible incentive structure, one that regulators must address through clear disclosure and penalty caps. With the UK’s BNPL market predicted to be worth £47 billion in the next four years, it looks like this strategy is working.
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Read moreDetailsWhat do regulations look like?
Frameworks like the United Nations Guidelines for Consumer Protection (UNCGCP) offer a foundation; however, regulators need to explore more adaptive oversight models that are tailored specifically for digital credit.
If BNPL providers extend consumer credit, they must be held to the same standard as traditional lenders. Regulators must treat them the same, applying the same diligence and scrutiny that traditional lenders receive.
The US Consumer Financial Protection Bureau (CFPB) deprioritizing the BNPL is a missed opportunity to protect the growing number of US consumers now using these services.
The UK took a proactive stance in May with the HM Treasury proposing legislation to regulate BNPL providers, offering a replicable model that prioritizes the protection of consumers. This act grants stronger rights to more than 10 million customers, dictating that services provide affordability checks, ensuring people don’t borrow more than they can afford. Shoppers will also gain the right to report companies to the country’s financial ombudsman service.
Conclusion
BNPL services walk a fine line between fintech and credit. Regulators must act with both urgency and coordination. As financial ecosystems evolve, regulation must follow at an equal pace to ensure consumer safety.
Countries should learn from the United Kingdom’s example and prioritize protecting vulnerable consumers by offering a clear path to legal recourse, mandating affordability checks and upholding market standards.
The popularity of BNPL is a symptom of regulatory stagnation and economic strain. Now is the time to prioritize coordinated global action to protect consumers and preserve financial stability.
John Byrne is founder and CEO of regtech provider Corlytics. A serial entrepreneur in the financial technology sector, he has built and sold a number of global technology based enterprises. He co-founded one of the first campus companies in Ireland in 1985 in the energy technology sector and built Information Mosaic in 1997, a global player in the securities software industry, which was sold to Markit in 2015. 
