• Samantha Fogerty, COO at Payl8r


• 15.04.2024 10:00 am
#innovation #lending #BNPL

We are in precarious economic times, the rise in cost of living, inflation and wage stagnation are all significant pressures contributing to many people being denied access to regulated financial services. Reports show that one in seven adults in the UK fall under the definition of ‘financially excluded’. It is crucial for the sake of economic growth, to provide financially inclusive services to this market segment. 

Traditional processes in financial services have been heavily criticised for being outdated, thankfully, major fintech innovations are bringing modern advances to these services, for example, Open Banking and Blockchain. Open Banking’s real-time affordability assessment allows lenders to look beyond a thin credit file and give an accurate picture of the borrower's financial situation. Blockchain has revolutionised how transactions are conducted by removing costs, improving efficiency and overall security. Both Open Banking and Blockchain are key examples of how fintech has been able to empower its users and promote inclusion. 

Alongside these innovations, Buy Now Pay Later (BNPL) services have been praised for providing short-term, low-cost loans to a wide consumer market, enabled through affordability assessment checks, allowing borrowers to take out loans with ease. While this may imply financial inclusion, the lack of regulation in this space reveals a worrying outcome. 

The cost of unregulated lending

The challenge with BNPL is that the vast majority of providers are unregulated, posing a huge risk to the customer. Research has found that 40% of people don’t view BNPL as ‘proper’ borrowing, indicating a lack of awareness and education around the subject. 

The risks associated with unregulated BNPL include the lack of visibility on credit files which allows consumers to obtain credit from any BNPL provider, even with existing unpaid loans and, if these debts can’t be repaid, hefty late fees can be applied. These debts are often passed on to third parties that can use aggressive collection tactics, the result of which only perpetuates the consumer's financial situation into a vicious cycle. 

Many people are facing huge financial challenges and desperately need access to financial services, but some current, dated technology, means that this section of the population simply cannot access regulated credit. This is pushing people towards relying on unregulated lending and in some cases, illegal loan sharks.

A strive towards innovative change 

We need more regulated and ethical BNPL options for those facing financial exclusion, thankfully, innovations such as Open Banking are a huge step forward in driving this. Open Banking unlocks the gateway for the underserved, by empowering customers to access their data and giving providers access to and use this data, reducing two types of information asymmetry. By innovating BNPL through the use of Open Banking, we are opening the door to ethical and convenient short-term loans– something that is a desperate need for many. 

The fintech industry has the capabilities and responsibility to reduce financial exclusion. To strive for innovation and change, we should be working closely with policymakers and regulators to ensure that we are making a positive impact across the communities we affect. Only then can we expect to see the positive outcomes of financial inclusion on our livelihood, quality of life and therefore, overall economic growth.