Latest research from Fair4All Finance highlights the impact of Buy Now Pay Later regulation, revealing potential blind spots in protection for people in financially vulnerable circumstances.

Niall Alexander, Credit and Consumer Markets Lead at Fair4All Finance, shares an overview of the report, and the implications for consumers, regulators and the market.

The regulation of Buy Now Pay Later (BNPL) will be one of the most significant changes to the consumer credit market we have seen, with new rules due to be brought into effect on 15 July this year. 

Our research report, Buy Now Pay Later: A Review of the Market, Risks and Trends, finds that while new safeguards are essential, they could come with major trade-offs that will directly impact the borrowers who need flexible credit the most.

Our new report confirms many of the known risks of BNPL, namely the high potential for over-indebtedness among vulnerable users and the prevalent lack of consumer understanding that BNPL is, in fact, debt. Our report also reveals the astounding statistic that 4 in 10 users still do not identify BNPL as a form of debt.

A deeper dive into the data reveals a surprisingly nuanced picture that suggests that BNPL is to a greater extent a mirror than a stimulus, more often reflecting existing financial struggles, than directly causing them.

Our analysis segmented BNPL consumers using a 6,000 person IPSOS survey based on financial health, from ‘Prime’ to ‘Distressed’ categories (those with markers like County Court Judgments (CCJs) or insolvencies).

We found that the use of BNPL does not significantly increase the likelihood of consumer financial distress by examining unsecured Debt-to-Income (DTI) ratios before and after BNPL use, and additional research shows that BNPL borrowing does not appear to increase the chances of financial distress 7-12 months after borrowing.

Across all credit segments, the increase in overall DTI as a result of BNPL usage was marginal. For example, even our most ‘Distressed’ segment saw their DTI ratio rise only from 35.8% to 36.43% – just 0.63% – after accounting for BNPL. This is largely because the average sum advanced remains relatively small, at just £88.

Our concern is that over cautious regulation may remove consumers from the BNPL market at a rate disproportionate to the harm it is causing, creating a credit cliff-edge for this group. In effect, there’s potential that the regulation could cause harm to the consumer groups which is has been intended to protect.

BNPL regulation: The unintended consequence for vulnerable borrowers

For years, the BNPL market has operated largely outside of the traditional regulatory framework, leading to a surge in both popularity and the risk of consumer harm, which is why we welcome the act of regulation. Our research reinforces the urgent need for this. It notes:

• That financial strain as a result of BNPL usage is often felt: 41% of users have struggled to make a repayment
• Financial vulnerability and reliance on BNPL to ‘get by’ is disproportionately affecting the ‘Struggling’ and ‘Squeezed’ financial segments, with 1 in 5 of these users now using BNPL for essential purchases like groceries and bills
• When payments are missed, the consequences are severe: around 2 in 5 users who struggled to repay had to cut back on essentials

With the introduction of new regulation, including mandatory, stronger affordability checks, these challenges are finally set to be addressed. However, the data reveals a painful paradox.

The exclusion paradox: When protection means less access

Stronger affordability checks designed to protect consumers will, by necessity, lead to more current users being excluded from the product.

Our modelling suggests that somewhere between 10-30% of current BNPL users are likely to be rejected after the new regulatory regime is fully implemented in July 2026. Crucially, this exclusion will be concentrated among those in the most precarious financial positions. These are the consumers who are most likely to use credit to manage cash flow and therefore benefit from BNPL as an alternative, interest free form of credit.

While preventing people taking out unaffordable credit is the correct protective measure, the fact remains that a significant proportion of consumers risk losing  a flexible, low-cost option without a clear, safe alternative to take its place.

The real risk: A gap in the credit market

The central concern is that without a viable alternative, those excluded from BNPL may be forced into more harmful forms of borrowing.

Preventing a consumer from taking out an unaffordable BNPL loan is only a victory if they do not replace it with a loan that does even greater harm.

If the consumers set to be denied access to BNPL turn to riskier options instead, like unlicensed lenders or even loan sharks, then that’s not just a policy failure; it’s a large-scale social risk.

This exclusion creates a clear challenge for policymakers and the financial sector. We must close the credit gap which will be created when BNPL regulation comes into effect.

The need for regulation is not in question: BNPL is credit, and regulation is vital. But it must also be proportionate. Our report argues that addressing this access issue is as vital as implementing the protection measures. We recommend:

• FCA guidance to prevent risk-averse overreach
• Innovation to reduce late fees for frequent users
• A rethink of Ombudsman fees to keep small-sum lending viable

This requires a joint effort between the Government and industry to rapidly develop a suite of ‘inclusive credit’ alternatives.

These new products must:

• Be affordable and fair, with transparent terms
• Utilise new technologies and data to accurately assess the true risk and affordability of a borrower, beyond simple credit scores
• Be widely promoted and accessible at the point of need, just like BNPL currently is

Our report provides a full analysis of the market, the experiences of consumers, and a detailed list of recommendations that would lead to a safer, more sustainable BNPL industry.

Regulation is not the finish line; it is the first step. We have an opportunity to build a safer consumer credit market, but we must be proactive in ensuring that safety does not unintentionally lead to exclusion for those who need safe credit the most.

Download the Full Report Now

At Fair4All Finance, we want to see inclusive growth of the consumer credit market that ensures all customers have a good credit option, if appropriate, when they need it. We see a role for community finance, banks and other responsible lenders to help meet that need where it is appropriate to do so, adhering to principles of fair lending, wraparound care and recovery.