The demand for ‘Buy Now, Pay Later’ (BNPL) options is rising. Allowing consumers the opportunity to spread out payments across weeks or months, BNPL offers initial interest-free credit on delayed payments.
As a result, BNPL firms have created one of the fastest-growing segments in consumer finance. Recent findings from GlobalData showed that BNPL transaction volumes hit $120 billion in 2021, up from $33 billion in 2019.
In the current climate, where UK inflation is at a 40-year high, and the cost of living is soaring, BNPL provides many with the ability to afford the products they want more quickly.
A short-term solution, but a long-term problem?
On the face of it, this sounds like a win-win. Consumers can spread out their payments with no added interest. But the problem is that BNPL is very much a modern-day debt targeted at people who aren’t historically good at managing their money; a recent study from the Consumers Association suggested that BNPL users are time poor and rate their confidence in managing money lower than those who did not use BNPL.
While mortgages and car leases, for example, have long been the norm due to the high purchase values of those assets, BNPL is often used to purchase comparatively low-cost non-essentials such as clothes, electrical devices, or event tickets. This means that individuals are taking out multiple small loans that can be difficult to manage and could potentially result in missed payments and bad credit scores. In fact, a third of UK BNPL users say they can’t handle the repayments. This begs the question, is BNPL good for financial wellbeing?
BNPL products have often been described as a ‘debt trap’. The staggered payments present a lower price tag to the customer, which can encourage impulse purchase decisions or, at worst, psychologically exploit people into buying something they cannot afford. There’s an obvious rationale for retailers to make use of these schemes to increase income in a time of low consumer confidence, but questions remain over its ethical implications.
Regulation is needed
The main issue is the delay in meaningful regulation of the sector. Money Saving Expert founder Martin Lewis recently expressed frustration at the “painfully slow” move towards regulating financial companies in the BNPL industry. And it was only in June 2022 that the Government announced its plan to strengthen regulation of BNPL lenders, although stricter rules are unlikely to come into effect until at least 2024.
Unlike most loans, BNPL purchases don’t require a credit check, meaning it is accessible to almost anyone with a bank account. And, unlike a mortgage, for example, in which lenders are obligated to carry out affordability checks on borrowers to ensure they can make the repayments, BNPL purchases require no such checks. This comes with risk; an individual’s change in circumstances, such as a redundancy or a costly emergency, can result in unserviceable debt levels and potentially spiralling late payment fees. Indeed, Citizens Advice recently found that two in five BNPL customers borrowed money to make repayments, including 51% of 18-34 year-olds.
Relief options for those who need them
There are better avenues to help consumers with their financial well-being. For example, financial services provider Think Money uses data and artificial intelligence (AI) to support customers by identifying their spending patterns, predicting their outgoings, and ringfencing funds to instil better financial discipline to ultimately improve their credit ratings in the long term. Additionally, Australian neobank Up Bank has recently launched a new savings service called Maybuy, which creates automated savings plans for users looking to purchase items online.
Retail banks should look to consider offering similar products and services to provide customers with an alternative to BNPL if they are in need of financial support.
We can expect to see many more of these types of products hit the market in the near future. For example, retail banks could start offering these types of payments to customers or partner with these financial providers to offer them.
Proceed with caution
BNPL services can be helpful for those who are careful with them, but healthier alternatives to managing money are out there and readily available. Taking out multiple debts over time can be a slippery slope, especially when using multiple different services. Finding alternatives is the safer and healthier option, at least until there is proper regulation around BNPL.
Financial services providers need to take ownership and give customers services that utilise innovations such as artificial intelligence to help them sustainability purchase what is necessary for them.
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About the Author: Simon Hull is the Head of Financial Services at BJSS.