The government recently announced that long-awaited Buy Now, Pay Later (BNPL) legislation will be launched next year, with the new rules set to give consumers stronger rights and clearer protections. Retail Systems senior reporter Silvia Iacovcich investigates how the new rules will impact the market and consumers, exploring the challenges and opportunities ahead.

Last week HM Treasury revealed that in 2026, Buy Now, Pay Later (BNPL) firms will need to comply with new legislation designed to provide consumers with stronger rights and more transparent information in line with other types of credit.

The long-awaited rules are game changer for the growing BNPL market, which saw around 6.8 million people in the UK using the payment option for the first time in 2024, according to research from personal finance site Finder.

Whie BNPL solutions can offer a convenient, interest-free way to alleviate the burden of large payments, research from Imperial College Business School warns that customers already at risk of financial difficulties are also more likely to increase their spending through these services.

By bringing BNPL under the oversight of the Financial Conduct Authority (FCA), the new rules will introduce mandatory affordability checks, clearer terms, faster access to refunds, and the right to escalate complaints to the Financial Ombudsman.

The legislation will also require BNPL companies like Klarna and Clearpay to guarantee consumers fully understand the terms of splitting payments, whether they can afford it, and how to get help if their financial situation changes during the process.

While the new law is a largely positive step for the unregulated market, as well as opportunities and consumer protection, it could also bring with it risks and challenges which FinTechs and merchants must prepare for as the countdown to launch begins.

New rules, new frictions?

Nikhita Hyett, general manager EMEA at fraud management specialist Signifyd tells Retail Systems that the new regulations may have a significant impact on the credit approval process.

“I wonder how much friction will be introduced in the payment process, how easy will it be to use BNPL services, and if credit decisions will be delayed,” she says.

She points out that the new system could yield mixed outcomes.

“New credit checks might exclude people with borderline credit histories or past financial issues, others who were previously denied could now be granted access to BNPL due to more rigorous credit checking processes,” continues Hyett.

Boosting customer confidence

Increased regulation and greater consumer protection could support greater borrowing confidence, enabling shoppers who currently shy away from credit to use BNPL as a financial tool, says Amy Knight, personal finance and small business expert at independent financial comparison website NerdWalletUK.

“While adjusting to new regulation could create a temporary dip, increased consumer confidence could ultimately drive-up sales for ecommerce businesses,” explains Knight.

Johannes Kolbeinsson, chief executive of payment processing firm Paystrax, argues for a more responsible model to be implemented. He gives Visa’s installment plans as an example, where eligible cardholders can split payments with clear costs over a defined period.

“That way, the provider’s revenue doesn’t depend on people falling behind,” he says. “It’s much more transparent and sustainable, and it feels like a healthier model for everyone involved.”

Security: a new risk?

Signifyd’s Nikhita Hyett warns that new regulations might introduce new risks for consumers related to potential account security breaches.

According to the fraud expert, new regulation will mean that users of BNPL services will have verified credit, potentially making accounts a more attractive target for cybercriminals.

“With official credit approval, if someone's account is hacked, fraudsters know they can potentially make larger purchases using their verified credit, making these accounts more lucrative for theft and unauthorised spending,” Hyett explains.

Cyber criminals are increasingly targeting existing accounts by gaining access, changing delivery details, and making unauthorised purchases using the account holder's credit or payment methods.

“BNPL providers must prioritise protecting user accounts from such sophisticated fraud attempts,” adds Hyett.

To protect themselves, she recommends BNPL consumers use strong, unique passwords for different accounts; stay vigilant about unusual account activity; and remain cautious about unfamiliar links.

A dip in checkout conversion

Josh Butterworth, head of payments at e-commerce tech provider THG Ingenuity, predicts that there will be a natural short-term dip in checkout conversion on BNPL payments as affordability checks lead to more declines.

“Merchants therefore need to take this opportunity to review their payments strategy and consumer offering to ensure that consumers have a choice of fallback options to ensure they continue to capture every scale,” Butterworth says.

In the long term, he expects that the regulation will act as a security blanket for consumers, leading to an increase in the BNPL share of basket they become accustomed to the new experience.

“In addition, as the lines are increasingly blurred between the two, more and more retailers might start offering fully regulated, interest bearing credit options at the point of sale,” he adds.

Small businesses at risk

George Holmes, managing director of funding specialist Aurora Capital, thinks small businesses will particularly feel the impact of the new legislation.
“Tighter rules will almost certainly mean more friction at the checkout and possibly lower approval rates,” he explains.

For small retailers and service providers already battling slowing demand and rising costs, any dip in conversions could hit hard.

“Many don’t have the same negotiating power or tech support as large brands when working with BNPL providers, so they’ll need clear guidance and tools to stay compliant,” he explains.

Janine Hirt, chief executive of Innovate Finance, agrees that while the new regulation is a positive step for consumers, BNPL provided by small businesses and sole traders will also be in scope of the regulatory regime, which could be a challenge.

She argues that tradespeople, for example, might be required to obtain an FCA licence to offer BNPL.

“Under the Treasury’s rules, a plumber who goes to a family’s home to fix a burst pipe will need an FCA licence to provide BNPL as a payment option: many of these traders are unlikely to go through this complex licensing process,” she argues.

“It’s unfair if families can’t spread the cost through BNPL and face the risk of interest if they are left with no choice but to use a credit card.”

Competitive imbalances

Keystone Law financial services partner Simon Deane-Johns highlights that the new rules apply only to third-party providers, emphasising how the new regulations are carefully crafted to avoid disrupting traditional instalment plans like gym memberships.

“The key challenge is that the current regulations only apply to third-party vendors, leaving merchant-provider BNPL potentially unregulated, leading to competitive imbalances” he says.

He sees the government’s strategy as a cautious “evidence-based” approach, where it is taking time to understand which types of merchant-provider BNPL services might need regulation in the future.

“This measured strategy allows for flexibility while protecting consumers, and It is a thoughtful way to introduce oversight without completely dismantling existing payment models,” he says.

However, Deane-Johns notes potential loopholes, suggesting that third-party lenders and merchants could still collaborate to create unregulated BNPL products by carefully structuring their financial arrangements.

According to him, this might lead to a competitive inequality among merchants where some can afford to offer instalment plans while others cannot, with the financial disparity creating anti-competitive dynamics in the market.

Andreas Mjelde, co-founder and chief executive of B2B payments platform Two, calls for similar transparency and security in B2B BNPL payments.

“With the gross merchandise value of B2B BNPL payments projected to reach nearly $670 billion by 2029, ensuring transparency and security in this space is just as critical,” he says.

“Just as the updated Consumer Credit Act aims to align pro-consumer and pro-growth objectives, policymakers should consider extending the same principles to the B2B BNPL landscape.”

Small vs large businesses

Nick Maynard, VP of FinTech market research at Juniper Research, believes larger BNPL providers will adapt more easily than smaller firms because they might struggle on the journey to regulatory compliance.

“While regulations will remove uncertainty and reinforce confidence, incentivising banks to become more involved in the market, smaller BNPL firms may struggle to meet regulations, but larger BNPL firms will be well positioned,” he adds.

Dean Johns agrees, stressing how upcoming BNPL changes are part of broader consumer credit reforms that will require financial businesses to navigate multiple legislative changes simultaneously and overhaul their processes, documentation, and training.

“Smaller companies, in particular, may struggle with consistent staff training and compliance as they work to implement and understand the new regulatory landscape” he notes.

An Open Banking-style system

In order to facilitate the transition to a more regulated environment, Dean Johns calls for an Open Banking-style framework to help consumers view all their BNPL commitments – regulated or not – providing a more transparent financial reporting system that gives consumers better insight into their total financial obligations.

“The key concern should be ensuring consumers can get a holistic view of their financial commitments across different BNPL platforms, and whether credit reference agencies will report merchant BNPL and third-party BNPL equally,” he says.

“Companies need to ensure customers not only understand their specific products but also comprehend their total financial obligations across different services.
“This means helping consumers recognise the full extent of their debt across multiple BNPL platforms.”

He stresses the importance of helping customers understand not just specific BNPL products but their overall debit levels across platforms.

“The goal is to proactively manage customer confusion and financial challenges before they escalate, thereby protecting both the consumer and the company's reputation,” he explains.

According to the legal expert, a holistic, empathetic approach to financial services that goes beyond simply selling a product, that includes genuine customer care and financial education, can help these firms navigate future challenges.

While the new rules are set to provide much-needed clarity for the BNPL market and protection for customers against the dangers of debt traps, firms must prepare for any risks or disruption that the regulation may bring – ensuring that there remains a balance between protection and maintaining security, innovation, and simplicity.

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