The UK's buy now, pay later market is feared to slow down, and financial payment institutions face profit squeeze.

From purchasing smartphones to ordering takeout, the buy now, pay later financial payment market in the UK is flourishing. This model allows consumers to make installment payments without interest and without the need for a credit check, making it a favorite among retailers and attracting more and more financial technology companies. However, as the UK government prepares to regulate the industry, institutions are rapidly entering the market, intensifying competition and posing a risk of squeezing industry profits. According to GlobalData Plc, last year's transaction volume grew by nearly one-fifth to around $27 billion, accounting for 7.7% of the entire UK ecommerce market. International companies such as Klarna Bank AB, PayPal (PYPL.US), and Afterpay Ltd. are driving this prosperity. More companies, such as the US startup Affirm Holdings (AFRM.US), are also joining in. Retailers like Sports Direct Ltd and ecommerce platforms like Very have started offering their own buy now, pay later services, and banks like HSBC HOLDINGS are also taking action. A key selling point is its convenience - usually just a tap on the phone is all it takes to complete a transaction. Sameer Pethe, a partner at consulting firm Kearney, said, "Affirm is entering a fiercely competitive field. Many merchants have entered the point of sale market." Matt Purnell, an analyst at Juniper Research, said, "The UK is one of the world's leading buy now, pay later markets, with high maturity, penetration, and competitiveness." He added that in terms of numbers, the UK has now surpassed the former leader, Sweden. New entrants are facing the risk that the retail market they are entering is facing a less bright future. Due to disappointing sales during the Christmas period and investors selling UK assets due to concerns about debt sustainability, shares of top UK retail chains plummeted this month. Thin profit margins The buy now, pay later market in the UK has grown tenfold since 2019. This growth has been driven by the cost-of-living crisis post-pandemic, the disappearance of "payday loans" type activities, and rising interest rates on other types of credit. Klarna currently has 10 million active customers, with the latest smartphones, athletic shoes, and gaming systems among the top sellers in the UK during Black Friday. Countless emerging buy now, pay later companies, including Sezzle Inc., Zilch Technology Ltd., DivideBuy, and PayL8r, typically earn revenue by charging merchants fees for interest-free loans (usually around 3% of the transaction cost). This means their profit margins are thin. When rates are close to zero, buy now, pay later companies charge these fees while paying almost no financing costs, but now they have to adjust their business models. Many banks have turned to securitization models, bundling these short-term loans and selling them to credit investors. For example, after a large round of financing in 2022, Klarna has been focusing on cutting costs but has yet to return to profitability. The industry has received support from major financial institutions like hedge fund Elliott Investment Management providing funds for Klarna, and KKR & Co.'s private credit arm providing funds for PayPal's European business. Ruth Spratt, Affirm's UK manager, said Affirm sees a "huge opportunity" in the UK and expects last year's growth to continue through 2025. Its goal is to beat competitors by offering a wider range of payment options and no late fees or hidden charges, filling in the "market gap". Tighter regulations With growth comes scrutiny. The UK's top financial regulatory body is drafting regulations that will take effect in 2026. Last year, the new Labour government promised to take action to "prevent people from accumulating unmanageable debt" and ensure fair treatment from suppliers. According to data from the Bank of England, consumer credit in the UK has been steadily rising in recent years, reaching a high of 232.6 billion in November, prompting action. The new proposals will authorize and regulate buy now, pay later companies like traditional lending institutions, requiring them to conduct credit assessment checks and provide customers with the same remedies. Spratt of Affirm said the company supports regulation that promotes consumer choice and transparency. Affirm is a leader in the buy now, pay later industry because it does not charge late fees, although if consumers are overdue for more than 120 days, it will hand the debt over to collection agencies, which may then charge fees. Law firm Hogan Lovells anticipates that buy now, pay later companies will eventually face requirements similar to other consumer credit companies. These measures include holding capital to counter potential remedies and losses. Industry consolidation Jonathan Chertkow, a partner at Hogan Lovells specializing in financial regulation, said, "Consolidation is almost certain to occur. A big company has seen this and is moving fast to become compliant. Smaller companies that do not want to do this will leave the market." This consolidation may bring opportunities for large buy now, pay later companies, but they will have to bear the higher costs brought about by regulation. A particularly concerning issue is that complaints cases are referred to financial ombudsmen, who charge companies 650 ($790) for each ruling after their first three consultations. According to Juniper's research, in the buy now, pay later context, this is a hefty fee, considering the average value of transactions in the UK is around 70. Pethe of Kearney said, "PayPal is doing this to win market share for its core business. Klarna is trying to get more people into it.""ecosystem."However, for consumers accustomed to smooth and rapid transactions, the additional checks may pose issues. It is difficult to align this with affordability for retailers and mandatory consumer protection disclosures. As market dynamics have weakened, some buy-now-pay-later companies have exited the market. In March of this year, National Westminster Bank in the UK discontinued its buy-now-pay-later service less than two years after its launch, while Laybuy entered into bankruptcy proceedings in June after failing to find a buyer for rescue.