The Buy Now Pay Later (BNPL) sector is forecast to grow approximately 25% a year between 2022-2028, against a backdrop of sharp increases in the cost of living. Jarred Erceg explains what this means for retailers.

We're seeing new entrants to the market all the time, including Apple announcing in March 2023 that their BNPL product will be integrated with Apple Pay, increasing competition among existing market leaders such as Klarna, PayPal, Laybuy, and Clearpay.

According to research from Bain & Co, while there's significant usage of BNPL among most age groups, it's more popular with Gen-Z and millenials. BNPL is used by people across all demographics, typically for purchases under £100, although the cost-of-living crisis means it's being increasingly used for ‘necessity’ items.

How do retailers benefit from BNPL?

BNPL products generally don't carry interest, but BNPL providers charge retail merchants a fee. Some, but not all, charge late fees to the customer. Importantly, the customer relationship is owned by the BNPL provider, rather than the retailer.

A BNPL offering is now a key part of many retailers growth plan, bringing various benefits, including:

  • being paid in full at the point of purchase, with credit and fraud risk passed on to the BNPL provider
  • increasing the affordability of the retailers’ products by spreading the payment over installments
  • attracting new customers by offering flexible payment options and leveraging a BNPL provider’s customer base to drive website traffic
  • customer loyalty, particularly when they have a positive experience with BNPL


FCA regulation on the horizon

Following the Woolard Review in 2021 and subsequent FCA consultation in 2022, BNPL is due to come within the regulatory perimeter, although final rules aren't expected until 2025. In the interim, the FCA has proposed that rules on creditworthiness assessments and how to treat customers in financial difficulty should be introduced, and customer complaints should be referred to the Financial Ombudsman Service.

BNPL firms will also need to develop workable solutions with credit reference agencies, allowing a consumer’s BNPL debt to be viewed by other credit providers as part of their required affordability assessments.

Challenges ahead for BNPL

BNPL providers have been buffeted by slower consumer spending, higher funding costs, increasing delinquency rates and intensifying competition. Valuations have suffered as a result. For example, in July 2022, Klarna’s valuation was cut from USD 46 billion to USD 6.7 billion and Affirm’s stock price is down 77% over the past year. Australia’s OpenPay, which only floated in 2019, went into receivership in February 2023 after suffering heavy losses.

Many BNPL firms have already started preparing for regulation, but the sector will still need to navigate significant change. Ensuring adequate affordability assessments, processes to identify vulnerability, and complying with regulation will take time and require significant resource.

What does this mean for retailers?

BNPL is here to stay. But retailers should be cognisant of challenges in the market. It's possible that it could promote impulse spending and, as the sector matures BNPL providers may look to charge higher merchant fees. In the event your BNPL provider fails retailers may need to quickly stand-up an alternative provider to minimize the impact on sales.

Retailers should use scenario analysis and stress testing to understand the potential impact across their business if this did happen. This will support a contingency plan, and give a level of comfort that there are adequate controls and procedures in place to mitigate the situation. 

For more insight and guidance, get in touch with Jarred Erceg.

To find out more about Grant Thornton and the services they provide to the retail industry, click here.

This article was also published in The Retailer, our quarterly online magazine providing thought-leading insights from BRC experts and Associate Members.