Buy Now, Pay Later calls for regulation

Eppo Heemstra
Connective Payments, December 2021

BNPL is taking the world by storm

Buy Now, Pay Later schemes are taking the world by storm. The new payments trend, commonly referred to as BNPL, already generates more than $100 bln in sales worldwide, influencing consumers’ choices of products and providers. Given the fact that the simplicity and transparency of BNPL products make them attractive to consumers and merchants alike, it is remarkable that BNPL schemes still fall into a regulatory grey area and receive minimal oversight from regulators around the world. Gradually, in response to criticism from consumer groups that many BNPL apps are driving consumers into debt, there are several initiatives by regulators and the industry itself to reduce over-indebtedness, especially of vulnerable people. 

Because BNPL volumes are growing rapidly, European regulators are expected to follow the examples of the Anglo-Saxon countries and take oversight seriously, to protect European consumers.

The biggest regulatory move that could impact the BNPL market is if state regulators redefine BNPL businesses as traditional lenders. They would then be subject to the same state usury limits that protect consumers from loansharking.


Cynthia Chen, Co-founder and CEO at Kikoff

Research from Kaleido predicts that BNPL value will reach over 12% of total global e-commerce spend on physical goods by 2025. Europe, where BNPL transactions on mobile are far higher than on websites, will be responsible for $347 billion of e-commerce spend via BNPL mechanisms by 2025, representing 30% of total e-commerce spend in that year (1).


What is BNPL?

Basically, BNPL schemes are a layaway plan in reverse. Instead of making payments over time in order to qualify for a purchase, you receive your item up front, then make your payments on schedule. BNPL schemes come in different forms, starting from zero to low-interest rates to self-selected payment plans, and in some cases zero late-payment fee. Generally, The BNPL apps are easy to use, have low fees and interest rates, and credit limits that allow for common purchases.

The typical arrangement is to put down 25 percent of the bill and pay the rest every two weeks in three equal instalments. However, payment arrangements may vary in terms of number of instalments, amount due at purchase, interest rate, late fees etc. Unlike a credit card, there is no set credit score required to use a BNPL app.

For merchants, the advantage of a BNPL payment scheme is that it avoids having to discount a product over time. Price tags, and therefore profits, remain unchanged. Furthermore, BNPL providers take over default risk.
The buy now, pay later option is typically offered as part of the merchant’s checkout process. BNPL giant Klarna recently tested a beta version of a browser extension, lowering the barrier to using the service even further. Powered by Piggy, this browser extension not only offers installment options, but also allows coupons and cashback offers to be added to purchases automatically.

More and more providers, users and transactions

There is a growing number of BNPL service providers in the market. The most popular providers are Affirm, Sezzle, Afterpay, Splitit, Perpay, PayPal Pay in 4, and Klarna. Of these, Klarna, Afterpay and Affirm are the biggest. As of June 2021, Swedish based BNPL provider Klarna counted approximately 90 million active users. Afterpay had 16 million active users, while Affirm had seven million (2).

In the UK, almost three fifths (57%) of adults aged 18 to 50  have used BNPL schemes in 2021.

In 2020, eight out of ten top global BNPL markets worldwide were located in northwestern Europe. The market share of BNPL services in domestic e-commerce payments in both Sweden and Germany, for instance, was around ten times higher than the same market share in global e-commerce payments (3). This is likely due to the popularity of Klarna, one of the most used online payment methods among German consumers in 2020:

Source: Statista

In these financially less secure times, paying after receipt of the order is extra pleasant for consumers. They do not have to pay immediately, but can pay at a time that suits them better. In addition, consumers mainly use post-payment because it allows them to see and try on their order first. It is therefore not surprising that, especially in the fashion industry, payments are increasingly made in arrears.


Christer Sjökvist, Chief Insights Analyst at Afterpay

BNPL versus consumer credit

These short-term lending programs are relatively new and do not have the same consumer protections as credit cards. Unlike credit card issuers, who typically stop payments when a transaction is disputed, BNPL providers generally require consumers to first contact the merchant to get credit for a refund or return. Until the lender is notified by the retailer that the transaction has been voided or a refund issued, the buyer may have to continue to make payments on his loan. That often leaves consumers on their own to ensure that the merchant follows through and the payment is credited by the BNPL lender (4).

Furthermore, consumers who use BNPL services face the same risks associated with general consumer lending. A study by Credit Karma showed 40% of BNPL consumers in the U.S. missed more than one payment; 72% ended up with lower credit scores (5).

A study by Cornerstone Advisors found that over the past two years, 43 percent of those who used BNPL services were late with a payment. Of those, two-thirds said the reason for falling behind was that they simply lost track of the payments, not because they did not have the money (6).
Recent research by financial advice service OpenMoney finds that the number of people struggling to pay off their BNPL debts in the UK has also risen to 43%. One in three users have turned to friends and family for help with repayments – an increase of 10% on 2020 figures. Seven percent took out a loan and five percent used a credit card to pay back the money (7).

Minimal, inconsistent oversight

BNPL businesses have long escaped existing government regulations by claiming that they coordinate and facilitate instalment payment plans on behalf of the consumer, rather than issue loans like traditional lenders. The common argument is that they are operated on trust and responsibility of the consumer to pay the instalments on time. In fact, BNPL schemes have much more in common with traditional lenders like banks and credit card issuers — both heavily regulated under EU / federal and state laws. Even if they don’t always conduct hard credit checks, BNPL companies assess credit risks of consumers and profit off those risks. Similarly, BNPL businesses can charge their users interest, late payments, issuance and processing fees.

Nevertheless, BNPL schemes fall into a regulatory grey area and receive minimal, inconsistent oversight from regulators, even though misuse, weak consumer protection and over indebtment are closely associated risks.

We distinguish three types of measures that can improve customer protection and strengthen the supervision of BNPL services:

  1. Individual BNPL providers revise their terms and conditions to smooth out the rough edges
  2. Market self-regulation
  3. Initiatives by state regulators to align BNPL with consumer credit regulations.

1. Smoothing out the rough edges

Klarna, a company that has over 90 million active customers and 250,000 merchants across 17 countries, is a prime example of a BNPL provider that has resolved complaints that its offerings are designed to lure users into debt. In response to sustained criticism of its business practices, the company is repositioning its product range in the UK. Klarna introduced the ability for consumers to pay in full at the checkout, stronger credit and affordability checks, clear checkout language, simplified terms and conditions, improved complaints handling and removal of last remaining late fees (7).

2. Voluntary codes of practice

One of the ways to respond to the criticism is self-regulation. As an example, the Australian Finance Industry Association (AFIA) has recently launched a voluntary BNPL Code of Practice, effective from 1 March 2021. The aim is to promote a “customer-centric approach to the design, marketing and distribution” of BNPL products and services; lifting industry standards; and supporting compliance with legal obligations. Even though the Code has only recently gone into effect, consumer groups have raised doubts about its likely effectiveness in protecting consumers. They have called for the government to follow the UK’s lead and regulate BNPL products like other credit products (8).

3. Aligning BNPL with consumer credit regulations


The UK government has recently opened a consultation on regulating BNPL firms. Furthermore, the Financial Conduct Authority (FCA) has commissioned an assessment of change and innovation in the unsecured credit market. The so-called Woolard Review, published in February 2021, draws attention to the urgent need to regulate all BNPL products, as “BNPL represents significant potential harm to consumers”. The review states that the FCA should work with the government to seek legislative changes as soon as possible to ensure such products are regulated by the FCA (9).
As a result, the FCA is rolling out regulations on the BNPL industry that would allow consumers to escalate complaints to a national agency.


There are also early signs of regulation in the US. For example in 2020, California’s Department of Business Oversight charged Afterpay for charging fees for making illegal loans. As a result of the case, Afterpay refunded $900,000 to consumers and paid a $90,000 administrative fee. 

This year, The Consumer Financial Protection Bureau warned US consumers that BNPL products can harm their credit history, carry late fees and don’t have the same protections as other types of credit (10).


Traditionally in countries like Germany, paying after delivery, by invoice, is a very popular means of payment, according to Arvato accounting for more than 40 percent of all sales in e-commerce. We can easily predict that BNPL products with instalment plans like Afterpay and Klarna will increase their marketshare even more in the coming years.

In terms of regulation, work is underway on a revision of the Consumer Credit Directive. This aims to better protect consumers in Europe and to achieve a more transparent European market for consumer credit. In the current – not yet final – proposal, post payments (within 3 months and at insignificant costs) will come under the scope of the Directive.

The Netherlands

As for The Netherlands, with 9% market share, BNPL is still relatively small compared to Germany and the Nordics. 
At domestic web shops, Dutch consumers prefer to pay with iDEAL. According to Daniel van Delft, CEO Currence, adding BNPL as a feature is part of the roadmap of the new iDEAL program. One of his concerns is whether a level playing field will be created for providers, in which there is an equal degree of supervision. At the moment there is little to notice.  

In principle, companies in the Netherlands require a license to provide credit if the credit product falls within the scope of the Financial Supervision Act (Wft). Financial services relating to credit that must be repaid within three months and for which ‘insignificant costs’ are charged (maximum 1% on an annual basis) fall outside the scope of the Wft. The upcoming Consumer Credit Directive would mean an amendment to the Wft. The AFM (Authority for the Financial Markets) can then also monitor these products.

The ACM (Authority for Consumers and Markets) states that paying afterwards is positive in itself, because it offers consumers the certainty that the product has been delivered before payment has been made. In the national campaign “Check first, then order” it is recommended to check whether payment can be made afterwards, in case the buyer does not know the company well (11).
At the same time, industry organisations like the VFN (Vereniging van Financieringsondernemingen in Nederland) are working on better lending standards. This is an important step to prevent people from ending up in problematic debt situations (12).

Whether it is self-regulation or legislation, regulation is not settled overnight. We are curious how fast the BNPL developments are going and to what extent the supervisory parties can keep up in the future, both in Europe and in the Netherlands.

I just think that the overall industry is shifting. The consumer sentiment is shifting towards asking for more transparent products that are actually designed not to screw them. It’s a good idea to have more regulatory attention to “buy now, pay later.” We’ve sort of positioned ourselves in such a spot that if the consumer is overextended, or if we are about to overextend them, we are far worse off.


Max Levchin, CEO Affirm

Picture of Eppo Heemstra

Eppo Heemstra

Partner Connective Payments
Partner, PSD2 lead & Compliance
+31 620 352 007


  12. ACM –
  13. VFN –

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