What can BNPL and payment firms expect from regulation changes?

Buy Now Pay Later (BNPL) firms are not on a path to later becoming the darling of the payments industry. They are already the payments business model of the moment. With the global BNPL market expected to reach a valuation of $38.57 billion by 2030 and over 50% of consumers having already used such services, their offerings are clearly proving exceptionally popular in the here and now.

However, the British Government is committed, alongside the FCA, to begin introducing regulation to firms such as Klarna, Clearpay, and more. For now, it appears that there is simply a wish for credit checks to become a requirement from 2026 onwards before customers are granted permission to take advantage of their services. Yet other types of payment firms can attest to the fact that once FCA involvement begins, further regulations usually follow.

Does this mean that BNPL firms are set to walk the same regulatory path? Let’s explore the compliance journeys of other payment firms to discuss whether BNPL can expect more regulations to come.

Payments’ path to regulation

Whilst the payments industry is renowned for unleashing innovation, this hasn’t stopped regulators from making their mark. This is despite lack of regulation arguably bringing forward hugely influential businesses such as Monzo, Paypal, and Revolut.  

For example, for a period of time, Monzo and Revolut were able to offer payment services and operate without a banking licence. Whilst PayPal made massive strides worldwide, innovated with freedom, and avoided the operational costs of regulations for years before the Payments Service Regulator came into force in 2009, by which time they had come to dominate payments. However, these household names, their sectors, and in turn any newcomers, are all now subject to regulations which weren’t present years ago.  

Initially, many parties were quick to voice concern over the prospect of regulating payment firms. The frictionless and fast experience of payments appeared under threat, timelines to implement Strong Customer Authentication (SCA) were felt to be too short, and the prospect of data sharing being introduced raised security concerns. The list goes on.  

Yet as time has gone on, the introduction of regulations has proved to be a positive. This is evident by the fact that 89% of UK consumers consider personal information security as the most important factor – above even ease of use – when choosing a payment method. Evidently, the public therefore wish for payment firms to meet high standards; something that only regulation can guarantee.

Furthermore, the necessity of payments regulation is reflected by the fact that numerous iterations have come to light since through PDS2, SEPA, SCA, and most recently because of the CP24/20 consultation. Their evolution is a testament to the industry’s strong innovation which has been able to persist despite regulation but is also evidence that regulation has a valid and contemporary place within the payments industry.

Ultimately, if regulators could impose themselves on some of the most influential payment firms of the early 2000s, and do so in ways that have appeased users without restricting innovation, what is to stop them from doing so to BNPL businesses too?

Taking the direct route to compliance

Compliance with regulations might not be the most exciting thing to think about. It might not even be thought about at all when said regulations don’t even exist yet for BNPL firms. However, by looking at what has happened to other businesses in the payments space, there is a clear trend appearing – regulation is inevitable, and once it begins, more tend to follow.

As a result, there is no harm with BNPL firms preparing for compliance changes, especially given that regulators often wish for quick implementation times. In contrast, there is a risk of a lot of damage if they do not prepare. After all, despite BNPL firms appearing to be a safe business on paper, they are particularly vulnerable to going under should credit losses mount whilst operating with only small margins.  

Unfortunately, the current economic and regulatory environments does not make good reading for BNPLs. For instance, strains on personal finances are seeing more and more users defaulting on their payments with nearly a quarter missing a payment in the six months up to December 2023, causing BNPL firms to absorb credit losses. In addition, new regulations are looming on the horizon which will inevitably increase operational costs and reduce margins.

Consequently, BNPL companies face the prospect of their margins being squeezed from both sides. Furthermore, credit checks could shrink their number of customers. This will see them run the very real risk of going under if they are not in control of their finances. Despite sounding counterintuitive, now is therefore the time for BNPL firms to invest.

How?

Through automated reconciliation software. As the preferred sure-fire way to confirm data integrity, cash-flow, and forecasts, automated reconciliation keeps finance teams in control of their finances in real-time. As a result, it is the perfect antidote to precarious margins.

In addition, reconciliation is often seen as foundational for making sure that financial regulations are met. For years this has been true for CASS rules, and as a demonstration of how fundamental reconciliation is for financial best-practice, it is already being positioned as the cornerstone for upcoming payment and e-money institution regulations following the CP24/20 consultation.

As a result, whilst a top-tier reconciliation process might not currently be a direct requirement for keeping BNPL firms compliant with regulations, in the future there is a high chance that it will become even more significant for other payment firms and play a key role in helping BNPL businesses manage their finances well.

Succeed now and later

Overall, regulation and any financial activity go hand in hand. Preliminary regulations for BNPL therefore now seem inevitable and it is highly likely that in the future more will follow.

Whilst this might sound daunting, when experience is available and strong foundations for your financial operations are in place, complying with new regulations becomes a lot easier. That’s why the likes of Moneybox, Octopus Investments, Swinton Insurance, and more highly regulated firms all turn to Aurum Solutions’ automated reconciliation platform which is tailored to their needs by a team of consultants.

If you would like to discover why for yourself, book your Aurum demo today.