Since entering the UK market back in 2014, the BNPL sector has managed to grow and carved its own market share, with providers such as Klarna and Laybuy becoming fixtures of the payments sector in the UK. According to GlobalData’s Ecommerce Analytics, the BNPL sector represented approximately 2.6% of the UK ecommerce market size in 2021. Though it is still small in comparison to other payment tools, this sector has managed to grow without any regulations or government oversight, and it is now affecting millions of UK consumers.
Despite being presented as a better alternative to credit cards, BNPL loans still present risks to vulnerable consumers given the lack of regulations in place. The introduction of a regulatory framework will establish a set of rules that will protect consumers and will also require BNPL providers to follow the same rules imposed to other credit lenders.
The popularity of BNPL loans was driven in part due to the ease of providing interest-free loans to consumers. According to GlobalData’s 2021 Financial Services Consumer Survey, 33% of UK respondents reported using BNPL services due to them being simple and fast. The integration of BNPL solutions at checkout allows consumers to be approved in a few minutes. Unlike credit card providers, BNPL providers are not required to conduct an affordability check on their applicant, instead relying on their own internal risk-assessment processes to approve them.
This lack of requirement makes it possible for applicants with bad creditworthiness to be approved for BNPL loans. Approving vulnerable borrowers is a risky decision for consumers who are unable to pay back their growing debts, but it is also a burden for BNPL providers themselves. According to Klarna’s 2021 annual report, it reported that its credit losses for 2021 reached $461m across all the countries it operates in.
Making its loans affordable has been part of Klarna’s strategy, but despite this it still suffers significant credit losses due to the number of consumers who are unable to repay their loans. By making creditworthiness a requirement for all BNPL providers, only consumers capable of repaying their loans should be approved.
This should reduce the written-off losses that BNPL providers suffer each year, and it will also prevent vulnerable consumers from taking on more debt that they can bear. The introduction of regulations in the sector should cover the main issues that are often raised against BNPL providers, with many having been criticised for not conducting thorough affordability checks on applicants prior to granting them a loan.
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Part of the appeal of BNPL loans is the benefit of easily obtaining one, and the requirement to conduct hard credit checks means that this process can be affected. But it is still possible to maintain the convenience of BNPL approvals by taking advantage of open banking data.
By leveraging such data, BNPL providers can gain access to credit bureaus, obtain the credit history of applicants, and assess how much debt they have already accumulated. By integrating open banking within their ecosystem, BNPL providers will be able to better assess the borrowing capability of each client before approving them for loans.
Under the new requirements, BNPL loans will have to be reported to credit bureau agencies. Credit bureaus did not have much visibility on the BNPL sector until now, so they will become an important factor in BNPL’s infrastructure from hereon.
This will benefit the entire credit industry as there will be better reporting of loans carried by consumers, but this will also benefit responsible consumers who repay their BNPL loans on time. They will be able to take advantage of BNPL loans to build or improve their credit score.
The sector is still young, only representing 2.5% of the global ecommerce market share in 2021, according to GlobalData’s Ecommerce Analytics. In order for the market to grow and reach maturity, regulations are required to make it sustainable and prevent large numbers of consumers from becoming victims of a system that they cannot be protected from. Regulations will put pressure on BNPL providers to improve their affordability checking and ensure that most of their customers are able to repay their loans.
Chris Dinga is payments analyst, GlobalData