No. 89: Buy Now, Pay Later (“BNPL”) Under Regulatory Scrutiny – The Evolving Regulatory Landscape for BNPL in the United States, the United Kingdom, and Europe


Publish Date:
June 2, 2022
Publication Title:
TTLF Working Papers
Stanford Law School
Working Paper
  • Diana Milanesi, Buy Now, Pay Later ("BNPL") Under Regulatory Scrutiny - The Evolving Regulatory Landscape for BNPL in the United States, the United Kingdom, and Europe, TTLF Working Papers No. 89, Stanford-Vienna Transatlantic Technology Law Forum (2022).
Related Organization(s):


The recent Covid-19 pandemic has accelerated the digitalization of finance and the migration of buyers online. Compounded by the pandemic, banking and financial services have undergone rapid and transformational changes, and the significant growth of digital commerce has led to record online payment volumes in both mature and developing markets. In addition, customer behavior and expectations have significantly evolved – today’s customers demand more digital and connected experiences and greater convenience, transparency, and personalization.
The combination of these factors has helped pave the way for the emergence of buy now, pay later (“BNPL”), which has quickly gained popularity with customers and retailers of all kinds. BNPL providers challenge traditional lending and point-of-sale financing business models such as credit cards by leveraging innovative technology and offering fast, frictionless, and accessible finance to a broader audience. As the name implies, BNPL allows customers to purchase products and pay for them in installments over a short period of time, typically at zero or low interest. BNPL firms offer seamless, flexible, and integrated financing experiences and usually perform only ‘soft’ credit checks on applicants. BNPL credit is typically extended to customers at the point of sale – online and in-store. Customers may use BNPL solutions through merchants who embed BNPL products in their check-out processes or via BNPL platforms enabling customers to shop anywhere in installments. BNPL companies tend to generate most of their revenues by charging fees to merchants for the services provided. Some BNPL providers also derive revenues from interest charges on longer-term BNPL loans and/or late fees or penalties charged to customers who fail to make the required BNPL payments on time.
BNPL transaction volume has rapidly increased in recent months, and further growth is expected over the next few years. Although the rise of BNPL has been particularly pronounced among younger cohorts like Millennials and Generation Z, BNPL adoption is growing steadily across other age demographic segments. Moreover, while fashion, technology, health, and beauty are the top categories for BNPL purchases, BNPL solutions are progressively broadening their reach to cover new verticals, including healthcare, hospitality, travel, and entertainment. As the BNPL market progresses on its rapid growth trajectory, significant capital flows into BNPL businesses. Competition is also quickly mounting, while consolidation is expected to accelerate as certain BNPL firms come to dominate in various geographies and acquire smaller rivals.
Thus far, fintech companies have taken the lead and have captured most of the value being created in the BNPL market. As the BNPL market evolves, fintech BNPL providers are expected to expand into deeper, more connected, and more frequent relationships with customers. These companies are increasingly rethinking and advancing BNPL products to make them more suitable and appealing to customers and businesses. Some fintech firms will continue focusing on servicing e-commerce merchants across an increased number of BNPL verticals and potentially branch into in-person consumption channels. Other BNPL fintech providers will likely cross into trade and business-to-business BNPL credit. Fintech BNPL players with higher levels of consumer loyalty and more active customer bases are expected to broaden the scope of their activities and build significant scale and engagement through the entire customer journey via “super apps,” offering a fully integrated ecosystem of financial and non-financial products and services shaped around users’ everyday needs.
While fintech BNPL providers continue innovating at speed, more established market players enter the BNPL space and join the race. Large technology companies and incumbent financial institutions increasingly see BNPL as a strategic area to deepen customer and merchant relationships. They are now considering the right BNPL business model to focus on, the verticals to prioritize, and how to go to market – from partnering with BNPL firms, to competing with them, to financing or acquiring them. Their future decisions will be key to watch as they leverage their extensive networks of merchants and partners and their customer bases and seek to evolve their offerings in response to rapidly changing consumer expectations and needs. Whichever approach they choose, large technology companies and financial incumbents must recognize that BNPL is part of a broader transformational change of the financial and banking industry into a more transparent, open, connected, and experience-driven ecosystem.
More and more customers around the world choose BNPL for simplicity of use and accessibility. When BNPL products are used correctly, customers can enjoy accessible and low-cost credit, seamless purchasing and financing experiences, flexible repayment schedules, and an increased ability to manage their cash flow and control their finances. BNPL solutions can also help unlock customer purchasing power and offer customers the opportunity to easily try out a product with no financial outlay at the time of purchase. In addition to helping customers, BNPL can provide significant advantages to merchants, as well. Merchants using BNPL solutions have recorded considerable improvements in key business metrics, including average order values and sales conversion rates. Moreover, merchants can use BNPL features to enhance customer experience and their customer acquisition and retention strategies. Merchants partnering with BNPL firms can also increase the exposure of their brand and offerings to existing and new customers and leverage their customer data and insights to better understand customer behavior, tailor their offerings to meet customer needs, and improve the value proposition of their loyalty programs.
Despite these positives, BNPL products are not without risks. Although BNPL firms typically offer interest-free payments to customers, some also charge late fees or other penalties if a customer fails to pay on time. Moreover, many BNPL firms report missed payments to credit reference agencies, meaning a customer’s credit score could be negatively impacted if the customer misses any required payment. Some customers may fail to appreciate the credit nature of the BNPL offers they are taking on and may, therefore, not apply the same level of scrutiny as they would otherwise do with traditional forms of credit. For some customers, the availability of BNPL credit during the check-out process may also encourage impulse buying. This concern is amplified by ‘soft’ credit checks and limited affordability assessments run on BNPL customers, which may lead to unsustainable levels of debt and cause consumers to take on more debt than they can afford and then struggle to repay it. These risks become even more relevant when paired with the use of complex and lengthy terms and conditions by certain BNPL firms, inconsistent practices in the BNPL market, as well as the lack of consumer protections otherwise applicable to traditional forms of credit (including disclosure requirements, resolution procedures and specific requirements around how to treat customers falling into difficulty).
Concerns have also been raised in relation to the absence of mandatory reporting to a regulatory body and credit bureaus, and the shortfall of data relating to BNPL transactions shared between BNPL companies and other lenders, which may contribute significant opacity to the credit market and make tracking BNPL credit across multiple providers very difficult. Moreover, protecting BNPL customers’ data and personal information has emerged as a further area of growing concern as the risk of data and cyber security threats intensifies.
In addition to the foregoing, critics have noted that most BNPL firms have so far scaled their activities in relatively benign market conditions. Over the last few years, the abundance of capital in private markets has created a relatively ‘cheap’ funding environment for BNPL firms to finance their operations, often at very high market valuations despite being loss-generating companies. Moreover, record-low interest rates have driven flows into the consumer credit market and have helped BNPL providers offer credit to consumers for no or very low interest while generating significant revenues from merchant fees (and, in some instances, late payment charges). However, these market conditions have rapidly changed in recent months, thus putting increased pressure on BNPL firms, driving up their cost of doing business, and causing some of them to reconsider their growth and expansion plans. Significant uncertainty remains as to the longer-term viability of the business models adopted by certain BNPL specialists, which are increasingly being tested due to fluctuations in the quality of credit performance, reduced merchant fees and narrow margins driven by increased competition, interest rate hikes, and the anticipated impact of future regulatory reforms. As the macroeconomic environment deteriorates further and public markets are down, BNPL providers are grappling with the prospect of an economic downturn. Some BNPL providers now face increased skepticism from investors and have a much harder time raising money, in some instances at considerably lower valuations and less favorable terms compared to their most recent funding rounds. Even the largest and best-funded BNPL providers have reported significant net losses. In response, they are considering (or have already announced) plans to cut their expenses in an effort to extend their runways, are shifting their activities away from growth ‘at all costs’ toward sustainable profitability, and are trying to diversify their revenue streams and sources of funding.
Furthermore, in recent months inflation has increased to reach its highest rates and the costs of living have risen dramatically, with the prices of non-discretionary items such as food and fuel rising the fastest. While this has caused a slowdown in consumer spending, it has also forced more people to turn to BNPL or similar forms of credit to pay for basic goods and services when they can’t immediately afford purchases. As more customers lean into BNPL products to cover essentials, concerns have emerged that more individuals may plunge into debt and struggle to pay their debts, and that default rates may sky rock and leave BNPL firms absorbing larger credit losses in the months to come.
The global consumer uptake of BNPL and the associated risks discussed above have caught the attention of regulators in the United States, the United Kingdom, and Europe, among others, and have highlighted the need for greater regulatory oversight. Although BNPL providers have been mainly operating outside of existing regulatory frameworks, the regulatory climate has been heating up, and scrutiny has significantly intensified in recent months. Regulators are quickly taking stock and are working to bring BNPL into their remit to improve the fairness, transparency, and integrity of the BNPL market and protect consumers from irresponsible lending and data-collection practices. Regulators are now deliberating on the implications of BNPL models, investigating the benefits and dangers created by BNPL offerings and assessing how to draw the boundary for BNPL regulation appropriately and proportionally to the associated risks. As with any fast-growing industry, the interplay between innovation, technology, and regulation will be a delicate balancing act. The future regulatory activity would need to be proportionate and balance the need to strengthen consumer protection and increase transparency and efficiency in the BNPL market, while also ensuring continued access to BNPL by customers and merchants and allowing innovation to flourish. Determining the appropriate scope of any future regulatory intervention in the BNPL market will require a nuanced analysis of evolving consumer behaviors and needs and an in-depth examination of consumer benefits and risks.
Current and prospective participants in the BNPL market are closely following the recent regulatory developments and watching for indications of the scope and impact of further regulatory activity and regulation expected to arrive in the near term. BNPL firms are encouraged to take appropriate steps to address relevant risks proactively. Going forward, transparent, clear, and fair BNPL terms and conditions, coupled with an intuitive, seamless, and flexible user experience, will play an increasingly important role in creating a best-in-class customer journey and better outcomes for customers and businesses. In addition, BNPL firms will likely need to provide more transparent guidance, simple communications, and educational initiatives to increase consumers’ awareness, help consumers understand how BNPL works and how to use it responsibly, and empower them to make informed decisions. Those BNPL providers who accelerate the work to build robust compliance procedures, improve risks and credit decision models, enhance data-sharing practices, develop effective fraud prevention and collection capabilities, and increase consumer protections and guardrails will be able to provide greater control and value to the end consumers, while also gaining more visibility and a better understanding of their credit and financial behavior. To continue to be relevant, BNPL firms will also need to carefully assess the impact of the evolving macro context of inflation and the shifting economic outlook on their performance and their customers’ spending and financing activities and evolve their offerings accordingly.
Undoubtedly, careful planning and common industry standards will play a pivotal role in delivering responsible credit alternatives and promoting long-term sustainable growth in the BNPL market, which in turn will help enhance the benefits and value to consumers and businesses. Informed guidance by regulators and policymakers and collaboration between them and the BNPL industry will be critical to shaping the future of the BNPL market while continuing to offer consumers innovative and empowering choices to manage and control their finances effectively.