Buy Now Pay Later reform: the ripple effect on retailers

Yesterday, the Government announced new regulations around the alternative payment method, “Buy Now, Pay Later” (BNPL).

The new rules, which will be rolled out next year, aim to provide better protection for consumers when shopping online and purchasing through unregulated borrowing.

Among shoppers, BNPL platforms — such as Klarna and Clearpay — have surged in popularity in recent years. Although, some experts say the increased use has led to a “wild west” of overspending and unaffordable debt.

But while these new regulations will have obvious benefits for shoppers, online sellers are left with great uncertainty over how this will affect future sales and profitability.

What are the new rules for Buy Now, Pay Later?

As the name suggests, BNPL is a type of short-term financing. It allows consumers to make purchases and either pay them at a later date or spread the cost across multiple, smaller payments.

Its flexibility and convenience have garnered mass popularity in the UK, particularly during the ongoing cost-of-living crisis. According to Finder, 42% of UK adults have used BNPL in the last 12 months  — up from 36% at the start of 2023.

As part of the Government’s Plan for Change, BNPL providers will have to follow standards to ensure consumers know what they’re signing up for, whether they can afford the purchase, and how to access help if needed. 

This includes carrying out upfront checks to ensure customers can afford to repay what they borrow, giving shoppers fairer and faster access to refunds, and the right to appeal to the Financial Ombudsman if anything goes wrong. 

“Buy-Now, Pay-Later has transformed shopping for millions, but for too long has operated as a wild west – leaving consumers exposed,” Emma Reynolds, Economic Secretary to the Treasury stated in a government press release.

“These new rules will protect shoppers from debt traps and give the sector the certainty it needs to invest, grow, and create jobs through our Plan for Change.”

Tackling the “wild west” of BNPL

The announcement comes as the use of BNPL payment options has skyrocketed in the UK.

Popular BNPL platform Klarna reached 11 million active customers in 2024, and reported a 30% increase in revenue growth.

But the surge in revenue has likely come at a cost for UK shoppers. As a study reported by Credit Strategy reveals, only 23% of BNPL customers feel in control of their spending when using these services. Meanwhile, 9% admitted to falling into debt. 

However, Klarna has argued that just 0.6% of transactions were referred to debt collectors last year. The company also says it has a “number of safeguards to protect consumers and ensure they’re able to meet repayments”, including eligibility checks on individual transactions and restricting services if there are missed payments.

“These guardrails clearly work as our loss rate is below 1% — 30-40% lower than what you’d see on a credit card,” a spokesperson told The Guardian.

What does this mean for ecommerce retailers?

While clear protections will be in place for shoppers next year, many retailers and online stores are left feeling uncertain about how these new rules will affect their business. 

After all, 90% of UK shoppers cited available payment methods as an influencing factor on making a purchase last year. 33% of those consumers reported using BNPL as their primary payment method.

“Tighter rules will almost certainly mean more friction at the checkout and possibly lower approval rates,” George Holmes, business finance expert and Managing Director at Aurora Capital, comments. “For small retailers and service providers already battling slowing demand and rising costs, any dip in conversions could hit hard.”

Moreover, according to Retail Merchandiser, businesses would have to obtain permission from the Financial Conduct Authority (FCA) to offer BNPL. 

This could see the regulator bombarded with hundreds of thousands of requests from retailers, potentially leading to a slow approval process.

Plus, with retailers and BNPL platforms set to have joint liability on complaints under the new rules, meaning sellers may have to pay penalties if something goes wrong with purchases worth over £100. 

“The goal here is definitely right: stop unaffordable borrowing and protect consumers,” Holmes continued. “But we need to protect small firms on the other side of the transaction. 

“Without the right tools and education, they risk being left behind in a space that’s rapidly becoming more complex to navigate.”