• Tom Eyre, Co-Founder and Co-CEO at Loqbox


• 15.05.2024 11:24 am

Consumers are increasingly using financial products like Buy Now, Pay Later (BNPL) to pay for their goods and services. The FCA reported that 27% of UK adults (approximately 14 million people) used BNPL at least once in the six months prior to January 2023. This is up from 17% who said they had used it in the preceding 12 months in May 2022. As usage grows, questions surrounding ethical implications keep cropping up.

We spoke with Tom Eyre, Co-Founder and Co-CEO of Loqbox, about the multifaceted aspects of lending, exploring the moral considerations of BNPL, the sustainability of lending business models, what regulations should look like, and whether people should even be using these services.

1. Let’s dive right in. What are the ethical considerations of lending products like BNPL, and how can risks associated with lending be mitigated?

Okay so, firstly, there are no ethical or unethical lending products – there are simply lending products and how consumers use them. You’ll find plenty of BNPL providers who are upfront and transparent about their T&Cs, and who go to great lengths to explain things clearly to people signing up for their services. There will also be those lenders who are counting on their customers not understanding the T&Cs and whose revenues depend on late repayment and penalty fees. Although different in many ways, we saw a similar issue a few years ago with the short-term high-cost (“STHC”) credit industry where products that served a specific purpose appropriately were either marketed or used inappropriately.  Ultimately it comes down to the practices of the individual lender and the behaviours of the consumers using the products.

Irrespective of whether it’s a credit card, a personal loan from a bank, or a BNPL service, there will always be people who can’t manage their money or run into financial difficulties – or those who have no intention of repaying money borrowed. Lenders take a risk every time they extend credit to people, and that risk has to be priced.

How do we reduce that risk? By educating people about financial health as early as possible, in exactly the same way that we educate people in English, maths, history and science. Schools teach people how to add and subtract, about Henry VIII, but they don’t teach people how to understand overdrafts or APRs, or about the financial services they’ll be using once they leave school. There needs to be a greater conversation around money, financial health and consumerism, and it needs to start as soon as possible. The best shield against poor consumer outcomes is a well-educated and empowered consumer base.

2. What does the future hold for those deceptive BNPL providers?

Many lenders have unsustainable business models, and we’re already seeing the consequences for these types of lenders – they’re downsizing, pulling out of markets, or going out of business altogether. This has as much to do with the funding and capital markets as it does with consumer use. The last few years have seen a wave of “businesses” growing at phenomenal rates in terms of user acquisition, with widespread adoption of new business models that simply can’t be sustained in the face of a lack of cheap capital. 

As the economy turns and access to cheap capital reduces, it is inevitable that those businesses that sold £1 for £0.50 will struggle to sustain the growth seen over the last few years. Expect to see many of these players exiting the market as quickly as they arrived. Consolidation of the market is likely to lead to better consumer outcomes, even if the better consumer outcome is a reduction in access to unsustainably cheap or free credit. 

3. What is your stance on regulating BNPL? 

BNPL regulation will only be worthwhile if it works in the interest of both consumers and businesses. Of course, some BNPL players say regulation will reduce the amount of innovation in the space. But if they were doing the right things by their customers from the start, they wouldn’t be complaining about regulation, because they’d have been self-regulating anyway.

But regulation should not be a knee-jerk reaction in response to a backlash against STHC credit, BNPL or any other new business model in what is clearly an incumbent-heavy space such as financial services. 

There have been numerous calls recently for a wholesale replacement of the Consumer Credit Act (the “CCA”), the legislation that underpins the consumer finance industry. I am extremely wary of regulatory revolution vs evolution. The financial services sector in the UK is one of the best in the world. It relies, in part, on clearly understood, well-defined regulation that has stood the test of time. This regulation forms the foundation of many established products and services. Wholesale change of regulation in the name of revolution in support of innovation feels like a potentially risky prospect. 

The Treasury had until recently been proposing a removal of the exemption that many BNPL players rely on to offer their products outside of the regulatory perimeter. Such a change seems like a sensible evolution of the CCA and, when combined with the nascent changes in regulatory approach brought on by the new Consumer Duty rules, it’s hard to imagine a world where regulated BNPL products do not take their place as a welcome part of a well-running financial system.

4. Is BNPL really all that innovative or is it just dressed up consumer lending? Should consumers even be using these services?

I don’t think most BNPL providers have ever disclaimed the notion that they are in the consumer lending business. They, and others like them, operate in the overlap of a particular Venn diagram: happy to operate as consumer lenders while running a business model that is anything but. The truth is very few pure consumer credit lenders could command the valuation multiples that some BNPL players do or survive the atrocious financial results many have had since day one. 

What’s innovative is not the business model, but the delivery of it through fintech-enabled and API-enabled solutions that simply didn’t exist until a few years ago. In a few taps of your smartphone, you can now be assessed and approved (or declined) for credit in a few minutes.

One of the key changes to the CCA is to remove an exemption under which BNPL providers have been operating. This would have the knock-on effect of requiring the retailers to become regulated credit brokers with all the burden that entails. I wouldn’t be surprised at all to see the eventual disintermediation of Klarna and the likes by substantial retailers who, when faced with the increased burden of becoming regulated credit brokers in order to offer third-party BNPL solutions at checkout, don't just do it themselves. Were retailers to offer BNPL products themselves instead of using third-party providers, then these BNPL products would once again fall under the exemption, reducing the potential burden on the retailers while potentially allowing them to take more of the pie for themselves.

For those BNPL players whose business model is to earn from retailers rather than directly from the sums loaned, the cost of credit, and loan losses, is effectively a substitute for their cost of acquisition. Burying acquisition costs deep within your financial reporting as loan losses is fine when access to cheap equity cash or capital markets allows you to increase valuations on top line growth alone, but eventually, for all consumer credit and quasi consumer credit businesses, you need people to pay you back.  And we haven’t seen a cycle long enough to know if BNPL is actually an effective credit product or just an acquisition play funded on cheap capital. Time will tell.

For me, the bigger innovation is about flipping BNPL on its head. ‘Save Now, Buy Later’ is a business model that has genuine and sustainable traction, and encompasses the financial education aspect that I’m so passionate about. ‘SNBL’ is where people should really be turning. This has the potential to not only help people buy what they need but teach them how to manage their money in a clearly understandable and safe way. SNBL can create good financial habits that will benefit people throughout their lives.

At Loqbox, we believe in business being a force for good in society. We launched in 2017, and since then we’ve helped over 2,000,000 people access a richer life by helping them build their credit scores, grow their savings, and just learn about how it all works so they can take their next steps more confidently. We are now expanding on our financial wellness tools to help more people around the world enjoy a happier, healthier relationship with money.