Buy now, pay later: the role of EU regulation in shaping the ‘new normal’

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The COVID-19 pandemic has seen a drastic expansion of e-commerce, and the rising star of online shopping is ‘buy now, pay later’ (BNPL). BNPL is a form of interest-free credit that allows consumers to make online purchases without using a credit card, and to pay for them later in one or several instalments.

BNPL as a regulatory challenge: more than a consumer protection issue

The rise of BNPL in the online shopping environment evokes mixed feelings. More and more consumers embrace its ease and convenience, and retailers benefit from higher conversion rates. Conversely, consumer protection bodies across the globe are sounding alarms, pointing to increasing evidence of consumer rights’ violations and over-indebtedness linked to BNPL. Marketed as a ‘lifestyle choice’ for the young consumers, the service exploits behavioural biases and normalises overspending.

Consumer protection issues raised by BNPL are not new: Europe has seen waves of payday loan overspending epidemics in the aftermath of the financial crisis. However, unlike the earlier short-term lending services, BNLP thrives off consumers’ desire for more transactional convenience rather than the need for an alternative source of credit.

The regulatory challenge posed by BNPL is therefore beyond merely ensuring that consumers are informed about hidden fees and risks associated with the new form of credit. Instead, the question is whether despite its pro-innovation attitude, the EU regulatory framework is effective in shaping the new normal that we see emerge.

New demand and digital consumers

The global pandemic has destabilised the economy, and changes in consumer purchasing behaviour reflect the changing market dynamics. These changes can be temporary or permanent. The most common temporary changes are reduced spending and shifts in priorities: consumers spend less and prioritise essential products (e.g. hygiene, cleaning) over non-essential ones (e.g. apparel, electronics). The shift to online shopping is different. Consumers, locked down in their homes, have turned digital. The new demand for omnichannel digital shopping across online platforms, including online stores and offers on social media, signals a permanent change in consumer behaviour.

Consumers desire seamless payment transactions in their online purchasing experience, and BNPL satisfies that expectation perfectly. Already prior to the pandemic, consumers were increasingly demanding faster, cheaper, more convenient, and more secure payments. With the lockdowns, more consumers from more diverse age groups became accustomed to online shopping. In Europe, it is predominantly young people—the Millennials and Generation Z shoppers—who ‘embrace digital shopping for its double benefits of convenience and safety’. For these young consumers, BNPL is part of the convenience of online purchasing.

Restrictions on spending and priorities will probably recalibrate once the COVID-19 emergency is over. The new demand for convenience in online shopping will, however, remain normal. So will BNPL.

The new market and the  #1 ‘unicorn’ in Europe

The transaction value of BNPL globally is expected to nearly double by 2025. Klarna, a Swedish online payment provider, is set to seize a good deal of the new market. Offering the ‘smooothest’ payment experience, Klarna allows its users to ‘shop now, pay later’. The company has seen its revenue increase by one-third as a direct outcome of its success in offering BNPL service, with its market valuation surpassing 10bn USD, almost double its 2019 valuation, making Klarna the #1 ‘unicorn’ in Europe. Although its credit losses doubled in 2020, the company is confident of its business model: the credit risk from individual consumers is mitigated by using data analytics-based proprietary scoring models, providing consumers with a fast, easy to use and convenient service.

Regulatory flexibility and innovation: the reign of convenience

If convenience is a modern day tyrant, in Europe its reign is perfectly legitimised. The Digital Single Market Strategy underlines the importance of greater choice and enhanced convenience. The regulation of innovative electronic payments—the plumbing of e-commerce —provides another example. The revised Payment Services Directive aims to facilitate the development of ‘innovative, safe and easy-to-use digital payment services.’ The EU regulatory framework thus embraces ‘convenience innovation’, that is technology-enabled innovation aimed at reducing consumer efforts (e.g. in the online shopping environment).

Regulatory flexibility is key in serving convenience innovation, and is based on co-regulation, industry expertise, and minimum requirements. Such regulation aims to ensure innovation is not restricted by rigid rules that fall short of keeping pace with innovation in the technologically complex digital markets. Innovative producers, such as Klarna or other FinTech start-ups, are believed to be best placed to satisfy the new demand, whereas the role of regulation is seen as merely risk and cost reducing: security and market efficiency have to be achieved at minimum cost. The effects of convenience innovation on individual behaviour are therefore largely outside of regulatory concern.

Limits to shaping the new normal

The EU regulatory framework has many tools to address issues arising with the growing popularity of BNPL. Consumer protection rules and minimum security standards will minimise the damage from unfair contract terms or payment fraud; fair competition and level-playing field rules safeguard the effectiveness of the market mechanism so that retailers and innovative service providers reap the benefits of the BNPL market; and financial supervision will ensure that the credit risks are under control, mitigating the threats to financial stability.

However, in the existing regulatory paradigm, the EU regulatory framework cannot steer innovation or engage with behavioural change. Instead, it is doomed to playing catch-up with the market reality, especially in the digital services environment, where service providers are the driving force. Regulatory involvement, beyond facilitating the emergence of new digital markets ‘in the interest of consumers’, stops there.

At the moment, service providers have the prerogative in shaping consumer behaviour and monetising on the result. BNPL is just one example. Consumer protection and financial stability risks aside, many economic opportunities brought by the COVID-19 pandemic, such as greater consumer demand for value-driven and sustainable online shopping, cannot be harnessed under the current approach and are left to the mercy of the market forces.

Will this approach lead to the new normal that we all desire?


Nikita Divissenko is a PhD researcher at the Law Department of the European University Institute. His PhD project deals with the legal challenges arising from regulating technological innovation, and his research interests include economic regulation, innovation, and regulatory theory.