New Fair4All Finance report into impact of Buy Now Pay Later regulation reveals potential blind spots in protection for financially vulnerable.

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.

we present the findings of a new bespoke survey of 6,000 consumers in which we explore who uses Buy Now Pay Later and how they compare to the wider population. We extend existing literature by segmenting our sample into different credit segments and drawing on bespoke survey modules to create composite measures of a respondent’s financial health and their experience of Buy Now Pay Later.

Our analysis finds that users of Buy Now Pay Later are:

• Likely to be younger and show lower financial health on average than our whole sample
• Less likely to have savings
• More likely to report struggling to access credit
• More likely to report having higher debt to income ratios
• More likely to use high-cost credit

Perhaps most importantly, our BNPL cohort is:

• More likely to report commonly agreed markers of financial distress, such as county court judgements (CCJs) and debt relief orders (DROs)

In our view, it is no surprise that consumers who show markers of financial difficulty are more likely to use easier to access or higher cost forms of credit. This poses unique challenges to the regulation of Buy Now Pay Later.

Our analysis and findings

Necessarily, a distinction should be drawn between the product’s propensity to attract riskier borrowers and the risks of the product itself. After all, evidence presented later in this paper shows that greater use of BNPL does not significantly increase the likelihood that consumers face financial distress in the medium term, although it does increase the likelihood of falling behind on BNPL products themselves. 

We believe – if used correctly – Buy Now Pay Later has significant potential to support financial inclusion by providing consumers with access to small amounts of interest free credit when they need it. Its nature as a small sum product borrowed and repaid over short time horizons makes it useful for introducing consumers who have previously found themselves locked outside of the credit market and for meeting short term credit demand for consumers who are underserved or have specific needs and preferences.

We are clear however that credit is not a solution to long term economic distress or limited economic growth because lending must be sustainable if it is to avoid resulting in short termism and negative consumer outcomes.

In light of this, we emphasise that the supervisory environment created by the Financial Conduct Authority is equally as important as the regulator’s rules. We argue that an overly cautious and risk averse application of new FCA rules could result in a significant proportion of BNPL users losing access to the product when they might otherwise use it responsibly and benefit from it.

We construct an indicative model which suggests around 20%-30% of users may lose access after regulation in July 2026, in line with other existing estimates. In many instances, this may be the best outcome. However, while not the sole defining criteria for lending, our model suggests that large proportions of those who might be rejected do not report falling behind on their existing BNPL use.

This is concerning given the growing body of literature indicating that the credit options available for credit consumers at the riskier end of the spectrum have declined significantly over recent years.

Evidence produced by ClearScore and Fair4All Finance respectively shows that offer rates for low income consumers have tumbled since 2020 and this is paired with increased concern about the prevalence of illegal money lenders.

A preview of recommendations

• The FCA should undertake research with Buy Now Pay Later firms to understand which consumers lose access to the BNPL market and how this effects their outcomes
• The FCA should issue guidance to BNPL firms supporting them to conduct affordability assessments in different circumstances
• The FCA should focus its supervision and innovation efforts on reducing the propensity of frequent users to fall behind and the associated late fees
• The Financial Ombudsman Service should consider amending its fee structure to create differentiated fees