The music has been slowing for a while in the BNPL market. And for the collapsed Laybuy – one of the major BNPL players – the music has stopped in recent days. It is not hard to see why.
The BNPL ritardando has correlated with two changes to a market that exploded at the end of the last decade. First, the heady days of Covid-era consumer spending are well and truly over. Second, regulators have started to pay close attention. Red tape is coming to a sector that has so far found itself outside of normal credit regulation. But it is not the end for BNPL and interest-free instalment credit.
It is the end for Laybuy (probably), but then again Laybuy is a New Zealand-based company serving the ANZAC markets in large part. But its larger competitor – Klarna – serves a much wider spread of markets and continues on its IPO track towards a listing on the New York Stock Exchange.
UK FinTechs in the BNPL space will eventually need to comply with UK legislation specific to the sector (and may need to be FCA authorised or be an appointed representative of an authorised firm), but that legislation has been slow in coming. The Government announced its intention to regulate in 2021 with the publication of an industry consultation paper, which was followed by the publication of a response in 2022. HM Treasury published draft legislation in 2023 and stakeholder feedback on that has been sought. There is currently no set timetable for the introduction of that legislation.
Ultimately, the BNPL sector is likely to be regulated by the FCA and this will, aside from triggering authorisation of the business itself, result in financial promotions having to comply with UK rules and the business being required to comply with the new consumer duty. For example, on the later point, BNPL-exempt business currently does not require the lender to assess whether the borrower has the ability to repay the loan which will be a feature of the proposed regulation of the sector. That probably has a short-term cooling effect on the UK's BNPL sector.
Certain firms will not want to comply and will have to withdraw from the UK. Others will be waiting to see what the new regime will look like and will be slowing development in certain areas as a result (or diversifying into providing other kinds of finance). Others – in the series A to series C stage – may have fallen away during the last 24 months because they have not been able to raise their next funding round – it has been a brutal period for mid-stage FinTech. We wait to see how a probable new Labour administration will engage with all that. It has not said anything in its manifesto.
Those early-stage ventures who can get through the bottom of the VC cycle and – when the legislation comes – continue on to become authorised and/or successfully apply for the relevant licences needed to carry out BNPL business in the future may well find themselves well positioned to raise further rounds of VC funding and be attractive targets for acquisition (perhaps by providers of other kinds of finance (credit cards in particular) who wish to diversify.
Originally published 24 June 2024
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