Levelling the Lending Playing Field

  • Todd Latham, CEO at Divido

  • 17.03.2023 11:45 am
  • #lending

Last year saw increased interest rates and the onset of the cost-of-living crisis. While December indicated increased spending, overall retail spend remained lower compared to 2021. With many consumers re-evaluating their spend as disposable income dwindles, now is the time to invest in implementing alternative financing solutions into payments systems and strategies.  

Our own data found that credit activations on checkout finance – where people applied to pay back purchases in interest-free instalments – were 50% higher than in 2021 during the Black Friday Weekend. Further, the sum of activated credit also increased by 23%, suggesting the offer of this type of retail finance gave a significant boost to the shopping-filled weekend. While spend increased during this period, it’s interesting to see how people financed their spend.

Data from Equifax showed that one in three Brits have now used Buy Now Pay Later (BNPL) services, up from 26% in November 2021. With increasing popularity comes regulation and governance, and payments providers, lenders and merchants will be under growing pressure to comply with developing legislation. Regulation will ensure consumers are being approved for finance plans in a responsible way and that consumers fully understand the implications of failing to make a payment. This will also support this drive towards sustainable lending, however it is likely that, to protect their reputation without losing sales, we will see a shift in merchants looking to work strategically with reputable checkout finance providers, to drive this forward. 

Providing support during challenging times

The modern-day BNPL providers, have lowered their minimum transaction limits so far that now even low-ticket items can be purchased in minutes. While this is empowering retailers in high-turnover categories, it has also led to many consumers taking out loans, which are marked on their credit reports. Such loans can have a snowball effect, leading to customers falling into arrears and having to borrow more to repay, and lenders taking the risk to foot the bill. 

However, there is some good in the BNPL boom. The model has allowed consumers to access high ticket items. BNPL could in fact support consumers in managing their personal finances if merchants, lenders, and providers of checkout finance can adhere to a standard of best practice. 

If provided responsibly, merchants can benefit from a boost in sales, reductions in cart abandonment and access to new customers, and lenders benefit from merchants’ fees. The cost-of-living crisis is an opportunity for lenders to support merchants through the economic squeeze, to offer checkout finance in support of higher-cost items. In turn, it will position checkout finance as an affordable, manageable alternative to traditional credit. 

Positively impacting credit reporting

BNPL shoppers still face the jeopardy of losing points off their credit scores in the event they miss a payment or fail to pay back their loan. As BNPL surges in consumer adoption, it carries all the risks with none of the rewards. Currently, BNPL is used by the younger demographic. In fact, research found that 42% of 16-to-24-year-old used BNPL services last year. 

Young adults tend to have the lowest credit scores and are more likely to fall into debt. Yet are also in need of financial products such as mortgages. Without credit cards, they have very few opportunities to build their credit. Equifax, Experian, TransUnion and now Zilch have gone on record to say that they are willing and ready to start reflecting data from BNPL transactions on consumer credit files. Furthermore, several BNPL providers have already made in-roads to start credit reporting.

The opportunity is ripe as usage of BNPL products continues. Regulation could mean that lenders take even more control over product usage by merchants, selecting whether they wish to know more information regarding a consumer’s BNPL history, especially if they think that information is necessary to make lending decisions. 

Regulation to support responsible lending

This year, we are likely to see more regulation take shape which will redefine the lending options available. Currently, the market is dominated by the likes of Klarna and Clearpay, who are dazzling consumers with quick-fix solutions to purchase items. 

In the absence of regulation, the market has grown unchecked. Hard credit checks were not required, and lenders were not obligated to report consumers’ loans to credit reference agencies. Furthermore, retailers failed to provide adequate communications about the nature and potential impact of BNPL, instead focusing on speeding customers through checkouts. In many instances, the customer was unaware of the potential repercussions they would later face, both in the form of late payments fees and negative credit scores. Customers who were already vulnerable at the time they took out credit suffered these financial consequences even more acutely.

Incoming regulation will help the industry take a more considered approach to distribute funds and ensuring consumers can repay. This narrative is not only coming from the industry but also from retailers, who for a long time have been focused on conversion rates at checkouts. Now, they’ll have an increased responsibility to safeguard end users and their reputations.  

As pressure continues for both consumers and businesses, BNPL can provide a helping hand. However, regulation will hopefully level the playing field and introduce more responsible lending options for consumers. In an effort to act on responsible lending, we’ll see retail finance enrich its own ecosystem by providing whitelabel checkout solutions, one that aligns with its brand image and promise. 

Until further regulation is imposed, lenders and merchants must take the initiative by balancing capitalising on the market opportunity with providing credit in an ethical manner. This will be a key priority as more utilise this offering. 

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