Buy Now, Pay Later (BNPL) continues to make headlines. Almost daily, I see articles about vendors entering the market, current corporate fundraisers and other stories of positive growth, but more worryingly also much about the societal impact of this essentially unlimited borrowing.
BNPL’s bad debts on the rise
Recent research from StepChange and Barclays found that around a third of borrowers cannot repay their repayments due to the cost of living crisis. Although Klarna questioned the research findings, pointing to complex and expensive financial products offered by traditional lenders, the fact that the number of BNPL purchases that buyers are currently repaying has almost doubled since February – with debt average over £250. – should be a major concern.
We are all well aware of the pressures that households are under, with millions of people forced to borrow to survive. Yet for too many people, BNPL retains the perception of being risk-free or – even – not being a form of borrowing at all.
The ideas received around BNPL are worrying. Our research shows that 81% of UK adults are unaware that the market is unregulated. Additionally, nearly half didn’t know they might end up dealing with debt collectors and 43% had no idea they might be hit by late fees.
BNPL misconceptions put borrowers at risk
These same misconceptions are putting borrowers at risk and it’s time for that to change. There seems to be growing concern about the risks posed by the lack of regulation of the BNPL market, echoing the warnings of many in the financial services industry over the past few years. But the change is too slow.
Despite repeated calls for tougher market rules to protect borrowers – something that needs to be given even higher priority in the current climate – regulation is far from imminent.
In fact we have only just received the response from the consultation and the response was accompanied by a hint from the Treasury itself that the regulations may not even appear in 2023 given that they seek to go through two more consultations before announcing the rules.
So it looks like borrowers will likely remain at risk for much of the cost of living crisis. Without regulation, some providers enjoy a perfect storm of lack of consumer understanding, easy access due to lack of comprehensive credit checks – although some providers have led the way and have already built this into their credit modeling. affordability, too few have followed suit – and a widespread reliance on credit due to the current financial landscape.
Cost of living crisis fuels reliance on BNPL for vulnerable people
Given that inflation is expected to reach and potentially exceed 11% shortly, as well as the expected peak of the energy cap from October, it is difficult to be optimistic that the financial pressure on the short-term households. Therefore, it is likely that people will have no choice but to use the accessible credit options available to them. Those who rely on BNPL as a crutch to fight through to payday and do not realize the risks are in real danger of falling into a credit trap that can quickly spiral out of control and accumulate unmanageable debt.
BNPL suppliers must improve transparency and treat customers fairly
This is where the industry can step up and support consumers ahead of incoming BNPL regulation. Lenders, as well as all financial services companies, need to improve both transparency and the financial understanding of their customers. These are all simple steps that will have a hugely positive impact on protecting borrowers and enabling them to make more informed decisions when seeking financial support. Lenders need to make it much clearer to customers that BNPL is a form of borrowing and as such involves risk – a key aspect of this is clearly publishing late fees and other additional costs for lenders. loan.
BNPL: a useful tool if used wisely
BNPL has been seen by some as the new wild west of the borrowing industry, taking over from payday loans. However, that’s not entirely fair. BNPL is a useful product when used correctly. The major problem is that many lenders create a lack of transparency around this and allow people to overspend and risk deep debt. Regulation will be welcome and is clearly needed, but borrower protection is a much larger and more immediate issue that needs to be addressed. The industry should not wait for the FCA to lead the way.
Neil Kadagathur is CEO and co-founder, CreditSpring