New ‘Buy Now, Pay Later’ Rules to Benefit Big Lenders, Not Hinder Them

The UK government’s move to regulate the fast-growing “buy now, pay later” (BNPL) sector is being framed as a crackdown—but for established players, it’s more of a welcome tightening of the reins than a disruptive showdown, as highlighted in Financial Times.

After years of delays, the Treasury has committed to bringing BNPL services like Klarna and Clearpay under the oversight of the Financial Conduct Authority (FCA). This long-awaited decision is aimed at cleaning up what ministers have referred to as the “wild west” of consumer finance.

Yet for many major BNPL providers, the “cowboys” image no longer fits. As Lex from the Financial Times puts it, “A new sheriff will find that most of the cowboys in the sector have already cleaned up their act.”

Rather than sparking resistance, the new regulations are expected to reduce uncertainty and raise barriers for newer, less-prepared entrants. Klarna, for instance, began implementing credit checks—something the proposed rules will soon mandate—back in June 2022, without disrupting its user experience. If the Swedish firm had serious regulatory concerns, it would have flagged them in the prospectus it prepared ahead of its planned public listing earlier this year.

The government’s agenda also includes reforms to the 50-year-old Consumer Credit Act. Surprisingly, this could benefit the BNPL sector. According to Lex, “some BNPL executives have been lobbying chancellor Rachel Reeves for changes that would make it easier to offer loans at smaller retailers.”

Still, the industry isn’t free of risk. The core business model—retailers subsidising interest-free loans in hopes of higher consumer spending—could become a liability in an economic downturn. If customers struggle to repay, some may claim they were misled into excessive borrowing. Proposed changes that would allow complaints to be lodged with the Financial Ombudsman Service could amplify this threat.

The broader challenge remains that BNPL lending has yet to face a true economic stress test. “The sector has never had its underwriting standards seriously tested,” notes Lex, adding that several smaller providers like Laybuy and Zip have already exited the UK market. Others may follow.

In the end, larger and more diversified firms—such as Affirm, which targets more affluent consumers, or PayPal, with its multiple revenue streams—may emerge even stronger. Regulatory compliance comes at a cost, but it’s one the bigger players can afford. A more robust legal framework, far from a hindrance, may actually help them fend off “lesser gunslingers.” “It won’t hurt them to have a regulatory sheriff keeping lesser gunslingers at bay,” concludes Lex.