The United Kingdom is taking steps to regulate the burgeoning buy now, pay later (BNPL) sector with the aim of protecting consumers from taking on untenable debt.
The country’s Financial Conduct Authority (FCA) this week fielded proposals surrounding the dispensation of the short-term loans, which are repaid over time, and the responsibilities of providers.
Under the new rules, financial services providers will be responsible for implementing affordability checks to ensure that consumers are able to handle the debt they accrue, and they will be compelled to provide faster refunds in the event that a purchase is returned. They new laws, which will take effect in 2026, also give shoppers the right to complain to the Financial Ombudsman about their BNPL experiences.
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According to the U.K. Treasury, the BNPL sector is growing rapidly, with an extra 2 million people coming to use such products in the U.K. since 2022—but regulations are necessary to make sure shoppers aren’t taking on more than they can handle.
“Buy-Now, Pay-Later has transformed shopping for millions, but for too long has operated as a wild west—leaving consumers exposed,” Emma Reynolds, Economic Secretary to the Treasury, said in a statement Monday. “These new rules will protect shoppers from debt traps and give the sector the certainty it needs to invest, grow, and create jobs through our Plan for Change.”
The U.K. has been working for several years to develop a new regulatory framework for BNPL—an effort that some in the industry have said they agree with.
“This is good progress for consumers. The area where we believe there is more work to be done is in the way these rules may impact small business growth in the U.K.,” said Janine Hirt, CEO of Innovate Finance, the industry body for FinTech.
“We remain concerned that BNPL business finance provided to sole traders will be in scope of the regulatory regime,” she said. “Specialist small business finance providers, or wholesale trade suppliers, currently offer this but are likely to withdraw such flexible repayment options, reducing sole traders’ access to reliable trade credit products.”
A spokesperson for Clearpay, the U.K. branch of Afterpay, told CNBC that rules would “give clarity and consistency to the sector, establishing a consistent operating environment and compliance standards for all providers,” while a Klarna spokesperson told the outlet that the company looks forward to working with the FCA as the regulation of the space continues to evolve.
Earlier this month, Klarna announced that the U.K. has become its third largest market globally, with revenue growing 30 percent in 2024. Since the Swedish fintech firm launched in the U.K. a decade ago, it has engaged 11 million active customers and expanded its merchant base to 60,000, including brands and retailers like John Lewis, Argos and Eurostar.
The company also asserts that BNPL services provide an attractive alternative to credit cards. Over the past 10 years, the company said it has helped U.K. shoppers avoid almost half a billion pounds of credit card debt. According to Klarna, most BNPL have lower outstanding balances than credit card users, averaging 150 pounds versus 1,295 pounds.
Despite the firm’s global growth—on Monday, Klarna revealed in a quarterly earnings announcement that it now has 100 million active users—it’s also taken some heavy financial hits as it transitions to a more AI-centric business model.
During the first fiscal quarter of 2025, Klarna’s revenue ticked up 15 percent, reaching $701 million—but the company also saw a whopping $92-million pretax loss during the quarter, a jump from $47 million in Q1 of 2024.
In its reporting, Klarna pointed to hurdles stemming from share-based payments expenses (the company fronts the bill for consumer purchases) and costs related to its now paused initial public offering (IPO). The company noted that its credit losses have grown from $117 million last year to $136 million this year—a 17-point differential—because shoppers have failed to make payments on time.
The firm also spoke to the significant challenges of implementing AI across operations, citing “severance-related restructuring costs” as another reason it’s bleeding cash. Klarna has slashed its workforce by 40 percent over the past three years due to the deployment of AI-driven processes, while increasing its share of tech employees from 36 percent in 2022 to 52 percent in Q1 of 2025.
CEO and co-founder Sebastian Siemiatkowski nonetheless said the firm’s AI-first strategy is “driving exceptional returns.” Ninety-six percent of the company’s workforce are daily AI users, which he said has helped Klarna increase per-employee revenue by 152 percent since 2023.
Klarna has “secured exclusive partnerships with major retailers like Walmart through OnePay, teamed up with DoorDash, and expanded our partnership with eBay to the U.S. after multiple successful European launches,” he added. During Q1, Klarna became Walmart’s exclusive provider for financing and it launched a partnership with DoorDash for larger purchases as the delivery service enters new segments like electronics, retail and gifts.
“The momentum is undeniable,” Siemiatkowski said.
Despite the company’s struggles, the market for BNPL providers from Klarna to Afterpay and Affirm only stands to grow.
A recent survey of 1,000 U.S. adult consumers conducted by PartnerCentric.com revealed that more than half (52 percent) utilize BNPL options, with 15 percent trying them out for the first time this year. One-quarter of shoppers pointed to the rising cost of living as the reason, with 59 percent of Gen Z and 58 percent of millennial shoppers utilizing BNPL options regularly.
And with consumer confidence at a low, inflation ticking up and the economy on increasingly shaky ground, the study showed that 35 percent of shoppers plan to rely more on BNPL this year.
