Buy now, pay later (BNPL) continues to dominate headlines. On an almost daily basis I see articles about providers entering the market, current firms fundraising and other positive growth stories, but more worryingly also plenty about the societal impact of this essentially unrestricted borrowing.
BNPL bad debts on the rise
Recent research from StepChange and Barclays revealed that around a third of borrowers can’t meet repayments due to the cost-of-living crisis. Although Klarna questioned the findings of the research, pointing towards high-cost and complex financial products offered by mainstream lenders, the fact that the number of BNPL purchases shoppers are currently paying off has almost doubled since February – with an average debt of over £250 – should be of huge concern.
We’re all well aware of the pressures households are under, with millions forced to borrow to survive. Yet, for too many, BNPL retains the perception of being risk-free or – even – not a form of borrowing at all.
The misconceptions around BNPL are worrying. Our research shows that 81% of UK adults are unaware that the market is unregulated. Moreover, almost half don’t know that they could end up dealing with debt collectors and 43% had no idea that they could be hit by late payment fees.
BNPL misconceptions place borrowers at risk
It is these very misconceptions that are putting borrowers at risk and it’s time that changed. It seems as though there is increasing concern around the risks posed by the lack of regulation of the BNPL market, echoing the warnings from many across the financial services industry over the last few years. But change is too slow.
Despite repeated calls for tighter rules on the market to protect borrowers – something which has to be even more of a priority in the current climate – regulation is far from imminent.
In fact, we’ve only just had the consultation response and accompanying the response was a hint from the Treasury itself that regulation may not even appear during 2023 given it is looking to go through another two consultations before announcing rules.
So, it appears that borrowers are likely to remain at risk for much of the cost of living crisis. Without regulation, some providers are capitalising on a perfect storm of a lack of consumer understanding, easy access due to lack of full credit checks – although some providers have led the way and already integrated this into their affordability modelling, too few have followed suit – and a widespread reliance on credit due to the current financial landscape.
Cost of living crisis fuels reliance on BNPL for the vulnerable
Given inflation is likely to hit and potentially surpass 11% before long, as well as the expected spike in the energy cap from October, it’s hard to be optimistic that financial pressure on households will ease in the short-term. Therefore, it’s likely that people will have no option but to use the accessible credit options available to them. Those relying on BNPL as a crutch to struggle through until payday and who don’t realise the risks are in real danger of falling into a credit trap that can rapidly spiral out of control and accumulate unmanageable debt.
BNPL providers must improve transparency and treat customers fairly
This is where the industry can step up and support consumers ahead of the incoming BNPL regulation. Lenders, as well as all firms across financial services, must improve both transparency as well as the financial understanding of their customers. These are all simple steps which will have a hugely positive impact on protecting borrowers and allowing them to make more informed decisions when seeking financial support. Lenders need to make it much clearer to customers that BNPL is a form of borrowing and as such comes with risks – a key aspect of this is clearly publishing late fees and other additional costs for borrowing.
BNPL: a useful tool if used wisely
BNPL has been viewed by some as the new wild west of the borrowing industry, taking the baton from payday loans. However, this is not entirely fair. BNPL is a useful product when used correctly. The major issue is that many lenders create a lack of transparency around it and are allowing people to overspend and risk falling into major debt. Regulation will be welcome, and is clearly desperately needed, but protecting borrowers is a much wider and more immediate issue that needs to be addressed. The industry must not wait for the FCA to lead the way.
Neil Kadagathur is CEO and Co-Founder, Creditspring