Britain’s buy now, pay later sector is entering a new era after nearly five years of regulatory delay finally gave way to formal oversight.
The Financial Conduct Authority assumed authority over the market from 15 July, bringing an industry that has resisted scrutiny firmly under its watch.
The UK’s BNPL market has grown dramatically, expanding from around £60m in 2017 to as much as £13bn in the past year, according to the Treasury.
The FCA has estimated the total bill for providers at £1.4bn, covering lost purchase volumes, compliance infrastructure, and tighter creditworthiness checks.
Around £929m of that figure is expected to stem from reduced profits tied to stricter affordability assessments, with £204m coming from direct compliance costs.
Late fee revenues are also projected to fall by £243m as affordability checks reduce the frequency of missed payments across the sector.
“More robust checks and additional disclosures are inevitably likely to introduce greater friction into the borrowing process,” said Damien Burke, senior director of regulatory practice at Broadstone.
Financial inclusion group Fair4All Finance has projected that the stricter checks could exclude up to 30 per cent of the nearly 11 million people who currently use BNPL services in the UK.
Despite the scale of the disruption, industry heavyweights Klarna, Zilch, and Clearpay have publicly welcomed the new framework rather than opposing it.
A spokesperson for Klarna said robust regulation that gives consumers “added confidence and strengthens their access to protections is a good thing.”
Philip Belamant, co-founder of Zilch, described the framework as a “significant moment,” while Clearpay said it “would help a consistent operating environment and clear standards for all providers.”
Prior to the new rules, only Zilch held full authorisation as a credit lender, having secured its consumer credit licence back in 2020.
The new regime will require firms to answer to the Financial Ombudsman Service for consumer disputes and conduct deeper assessments of borrowers’ incomes, spending habits, and existing financial commitments.
Senior executives will also fall under the FCA’s senior managers regime, making them individually accountable for conduct and personally liable to fines if rules are breached.
“The transition will require significant investment from providers,” Burke told City AM, underlining the operational challenge facing firms of all sizes.
Smaller fintechs are expected to feel the sharpest pressure, lacking the resources and scale to absorb authorisation and ongoing compliance costs.
“Smaller fintechs may struggle with the costs of authorisation and ongoing compliance, paving the way for the bigger players to remain front and centre,” said Zoe Morton, consulting director at RSM UK.
Morton added that traditional lenders “who are well versed” in regulation could gain ground, while smaller firms make “some exits from the market” under the tightened environment.
High-street banks, newly emboldened by a more level playing field, may view the regulatory shift as a point of entry into the sector.
“Banks in the UK could see this as a new point of entry,” Morton said, adding the new checks could put them “into a good position to diversify.”
Natwest previously attempted to enter the BNPL market with a product launch in 2022 but abandoned those plans less than two years later.
Lloyds maintains a tie-up with Newday’s credit platform Newpay, which functions as a buy now, pay later arrangement but operates on a bank-grade credit facility resembling a digital credit card.
Neobanks Monzo and Revolut have also staked their claims, with Monzo launching its Flex pay-later service and Revolut making its first move in the Irish market.
“We could see some M&A activity in the form of market consolidation if some of the smaller players in the market are unable to keep up with the new regulatory requirements,” Morton warned.
Established BNPL providers may ultimately find that in welcoming regulation to legitimise their sector, they have invited far wealthier rivals to compete on their turf.