• Neil Kadagathur, CEO and Co-Founder at Creditspring


• 14.03.2022 04:00 pm
#finance #BNPL

Household finances across the UK are already stretched thin. The added pressure of a steep rise in energy prices and spiralling inflation could not have come at a worse time. 

Many are struggling to make the purchases they need or want, which has sparked significant growth in the Buy Now Pay Later (BNPL) sector. The charity StepChange recently warned that BNPL is being widely used by people experiencing financial difficulties, with research showing around 5.2 million people have now bought one or more items using BNPL.

The frequency with which people access BNPL solutions is increasing rapidly as the cost of living continues to rise. A report from TSB found 18% now use BNPL at least once a month, with 11% using it once a week. This comes at a time when 31% are feeling less confident in their financial situation, according to Creditspring research.

BNPL debt is unregulated, meaning lenders do not have an obligation to consider affordability when accepting a customer. The issue here is that people who are already financially unstable may risk getting into more debt. Whilst ‘instalment plans’ may sound more palatable than ‘debt’, fundamentally BNPL schemes are still a form of borrowing that can come with late payment charges - and therefore still a driver of debt. 

A vulnerable target market

More needs to be done to protect consumers from the potential pitfalls of BNPL. This means educating consumers, raising awareness of the traps people can fall into, and making sure lenders are taking consumer outcomes into account. What may initially appear a harmless purchase before payday can quickly escalate into an issue that can impact credit scores, hamper someone’s ability to borrow in the future, and even bring debt collectors knocking.

Part of the problem at the moment is that BNPL providers aren’t required to report repayment history to credit reference agencies, which means that other lenders won’t know how much BNPL debt an applicant may have. This reduces the likelihood of responsible lending, and puts borrowers at a greater risk of falling further into debt.  

We’ve seen the industry take small steps towards the adoption of higher standards when it comes to consumer protections. The FCA, for example, recently announced that it has secured changes to potentially unclear and unfair terms in the consumer contracts of some BNPL providers. And credit reference agency TransUnion recently announced its intention to include buy now, pay later data in consumer credit files. These are undoubtedly welcome moves, but it is not enough. Current affordability checks in the BNPL sector simply aren’t robust enough. BNPL providers need to act like other lenders - carry out adequate creditworthiness and affordability checks before deciding whether to grant someone a loan, and report that debt to credit reference agencies so that other lenders have a full picture of a person’s financial situation. 

It's a vicious cycle that threatens the financial wellbeing of many borrowers across the UK. LexisNexis research has highlighted that more than seven million people in the UK fall into the definition of ‘financially excluded’, meaning they could potentially find it difficult to access affordable and fair credit. For many, BNPL schemes are a slippery slope to reducing their options even further and pushing them towards using higher cost borrowing options - such as payday lenders - in the future.

Creditspring’s own research has flagged that young people are adversely impacted. We found many 18-34 year-olds are anticipating that borrowing will become a necessity during the next three months, with almost a quarter (22%) indicating they will need to borrow to survive, compared to just 2% of those aged 55 and over.

Many millennials are wary of borrowing following negative experiences with unscrupulous lenders. Of the 18-34 year-olds who have previously borrowed from high-cost lenders, 30% fell into a spiral of debt. And the very youngest have been hit hardest of all – 37% of those surveyed from Gen Z (18-24) have been pulled into significant debt problems after using high-cost credit.

The wait for appropriate regulation goes on

There is a pressing need to regulate the BNPL market to protect consumers against unmanageable debt. In January 2022, the UK Treasury closed a public consultation on BNPL, paving the way for a regulated legal framework. The Treasury has made a number of sensible proposals, including a need for BNPL providers to better assess a customer’s ability to pay and repay. This is crucial to protect consumers but also to protect lenders, helping them to offer transparent, affordable options to those in need.

Once regulation of this sector finally kicks in, BNPL providers will be required to perform the same stringent affordability and credit checks as the wider lending industry, but with no date on the horizon yet, they can still accept customers who may struggle to meet repayments. 

If regulation is not imposed soon, we risk a ‘Payday 2.0’ situation happening. Lenders will keep making money in spite of damaging consumer outcomes; the regulator will eventually get involved and most of the money being made by lenders will have to be returned, causing numbers of BNPL bankruptcies across the industries and leaving consumers in the lurch. Regulation cannot come soon enough.