The BNPL treadmill – genuine financial aid or a new mask for predatory Payday loans?

Retailers of all shapes and sizes are implementing Buy Now, Pay Later services to give consumers a way to manage bigger purchases, but many have questioned whether it is instead encouraging irresponsible spending habits and driving a nation further into debt. Ross Law reports.

During the Covid-19 pandemic and resulting lockdowns, jobs losses and employment instability caused the Buy Now, Pay Later (BNPL) sector to flourish as consumers looked for ways to spread the cost of purchases.

While this credit segment has since peaked, it remains a formidable force in 2023. BNPL has reshaped the commerce landscape by allowing consumers to defer or spread the cost of payments without incurring any additional interest both from online and physical retailers.

Research firm GlobalData forecasts that the BNPL sector will surpass a $1 trillion valuation by 2030.

Separate UK-centric research has been less positive, at least for BNPL’s direct consumers. The ongoing cost-of-living crisis has seen food inflation soar to its highest levels in 45 years. Paired with increased energy price rises largely attributable to Russia’s invasion of Ukraine, the average Brit’s finances are squeezed to the greatest extent since the 2008 financial crash.

With this in mind it is no surprise to see the prevalence of BNPL services being offered by retailers. To make ends meet, Brits’ usage of BNPL has significantly risen with 70 per cent reporting use of the service as a direct result of the cost-of-living crisis, according to a report from Forbes Advisor.

While the first wave of BNPL from retailers like Very and services like Klarna primarily targeted the online shopping millennial generation, research from the Centre for Financial Capability (TCFC) – a charity focused on early intervention financial education – found that BNPL usage among pensioners “almost doubled” from 2021 to 2022.

Jane Goodland, chair of the TCFC has said the charity is concerned over a potential lack of financial literacy and awareness which can lead to further indebtedness, noting that BNPL usage can have a snowballing effect over time.

A move towards regulation

After a two-year delay after announcing it would look into BNPL, the UK government has recently begun consulting on proposed draft legislation which will bring BNPL payments under the regulation of the Financial Conduct Authority (FCA).

Labour MP Stella Creasy has been a vocal critic of the lengthy gap between the government’s initial announcement and the recently launched consultation.

“Today they announce it again as if taking action," she tweeted. "No actual laws means more time for these vultures to target people in a cost-of-living crisis.”

Speaking to FStech, Samuel Murrant, consulting director of financial services at GlobalData argues that this ire is overplayed, saying: “Hard times always inherently cause a demand and surge for cheap and easy credit, but BNPL is a
pretty benign form of it.”

Some have claimed BNPL as the next incarnation of Payday loans, a form of credit lending which exploded after the Global Financial Crisis of 2008, but the analyst argues that it is not as patently predatory.

"BNPL loans are nowhere near what that was,” Murrant says. “Once regulated you could see in the numbers how predatory their pricing structure was.”

While the analyst says that BNPL may not be as inherently predatory as unregulated Payday loans, similar issues remain. Recent research by Citizens Advice found that one in 10 BNPL users are being pursued by debt collectors, indicating a need to overhaul the way in which BNPL is advertised and operated to make more consumers aware of the risks.

Areas requiring regulation

Noting that BNPL loans are generally interest free within the bounds of the repayment period, GlobalData’s Murrant believes the key issue and need for regulation should centre on how BNPL is marketed, or rather not marketed.

“A lot of the advertising in the space is a bit heavier on the fluffy friendly stuff and a bit lighter on the exact terms of repayment and potential issues consumers could fall into when they don't keep up with repayments,” he explains.

“A lot of the BNPLs will involve credit collection agencies if they don't pay them back – a fact which isn't necessarily front and centre in the advertising."
Addressing this more serious side of BNPL, Murrant says: "The issue is when you take out too many BNPL loans beyond your means and find yourself in a position where for the next month, you have several hundred of committed outgoings on BNPL loans.”

He adds: “While you could technically afford it, it means you are potentially on a treadmill where you may need to be borrowing more money to afford repayments in future along with everything you need for that month.”

While it is not currently clear what form of regulation BNPL will take, there is a growing consensus that BNPL advertising – in the same way as cigarette packets or now ubiquitous vapes – should have its advertising curtailed in a way that better conveys the service is essentially a short-term loan that must be repaid within the agreed upon period.

If the grabby way in which BNPL is marketed is not entirely stomped out, critics have argued that the practice should at least include more disclaimers around the perils of using a product which is another form of credit at its core.

While it can help responsible and well-informed consumers to purchase big-ticket items like white goods or a new TV, those who fall behind on repayments should hold no doubt that the bailiffs will come.

It remains to be seen just how much of the burden of ensuring that consumers are appropriately informed of the consequences of BNPL will be thrust on retailers by the regulators.

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