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March 18, 2022

Rising cost of living in the UK could push further adoption of BNPL

Chris Dinga assesses the prospects for further growth for the BNPL sector in the UK and the associated risks that brings

UK consumers are seeing their salaries lag behind growing inflation. As a result, buy now, pay later (BNPL) services are being used by many to compete with the expensive cost of living and alleviate stress. But for some consumers, BNPL can become a debt trap.

The rising cost of living in the UK is rapidly chipping away at the discretionary incomes of consumers with limited budgets. To deal with these challenging times, some consumers are looking to adopt alternative loan solutions such as those from BNPL providers. While these offer interest-free loans, BNPL solutions are not meant to be used for daily expenditures, and an over-reliance on them could lead to a scenario similar to the payday lenders’ scandal.

UK consumers are facing challenging times as their cost of living skyrockets. The main reason for this is inflation, which has now reached 5.5% and could keep rising to the end of the year. Meanwhile, salaries are not growing as fast. According to the Office for National Statistics, salaries (excluding bonuses) in the UK increased by 3.8% between November 2021 and January 2022. Further cost increases are to be expected for the rest of the year, with utility bills projected to increase by 54% in April following Ofgem’s revised price cap, a move that will directly impact 22 million customers.

BNPL bad debt challenge

Some consumers facing difficulties with increasing living costs are relying on loans to keep them afloat. Merchants are aware of consumers’ issues, and BNPL provider Zilch and supermarket Flava are offering BNPL services to consumers to help complete their grocery shopping. While these interest-free solutions appear to be a better alternative to credit cards, they present a danger for consumers to accumulate significant debts that they are later unable to repay. Due to the lack of regulations, BNPL providers can offer loans to consumers without conducting a background check on them. This could lead to consumers who are already heavily in debt borrowing additional loans from multiple BNPL providers and being unable to repay them.

In its recent survey, Citizens Advice reported that one in 12 people used BNPL services in the last six months to pay for basic goods such as food, and young consumers and those receiving government benefits were twice as likely to rely on BNPL solutions to purchase such goods.

BNPL regulation long overdue

Given the lack of regulatory oversight, there is a risk that these solutions will become a primary mode of payment for low-income consumers, which could lead to them accumulating a large amount of debt. Regulations are needed to introduce procedures that would ensure only consumers who are able to repay their loans are approved by BNPL providers while protecting consumers who are experiencing financial hardship.

The ‘eat or heat’ dilemma is becoming a reality for many UK consumers, as one in five households reported having to reduce spending on food in order to pay for essential bills, according to The Guardian. This highlights the tough decision some UK consumers now have to make. Access to cheaper debt and protecting consumers will only stretch out the problem instead of fixing it. The root cause is a cost of living that is rising faster than consumers’ salaries.

BNPL services, which were initially meant for fashion and ecommerce, could rapidly expand in new areas such as grocery shopping in order to ease expenses for UK consumers who are seeing their cost of living rise. While these services could be an interest-free alternative to credit cards, some vulnerable consumers are at risk of accumulating loans that they are unable to repay and find themselves trapped.

Chris Dinga is Payments Analyst, GlobalData

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