I have to admit that I haven’t bought anything on what is the latest trend in short-term finance, Buy-Now-Pay-Later (“BNPL”), although I can see the temptation to do so. However, whilst I see many pros to the product, my professional background in restructuring and regulation keeps drawing me to the cons.
As a young adult I was encouraged to apply for a credit card, use it, pay off the balance at the end of the month, and build up my credit score. This approach has served me well and therefore I’ve yet to be tempted with the plethora of ‘at the counter’ promotions for various BNPL providers when I’ve gone out shopping or when I’ve been at the online checkout for the next purchase on Amazon, amongst many others.
Anyway, I am told by some of my more youthful colleagues that BNPL is the way forward and, for many, it has replaced a credit card, which quite a few of them don’t even own. But I do worry that there are many people who are using BNPL in lieu of a credit card who are unsighted and oblivious to the potential pitfalls of the product. Whilst it is so easy to purchase items at numerous retail outlets or online with BNPL, with no affordability checks undertaken, consumer debt will inevitably build up, particularly as the increase in the cost of living and inflation take hold.
From 1 June 2022 Klarna will be reporting payments made by consumers to UK credit reference agencies, Experian and TransUnion. This could be advantageous for some consumers who will benefit from a potentially improved credit score in due course. For those that don’t keep to the payment terms on the BNPL product, often used to pay for a non-essential impulse purchase, lasting damage could be done to their credit scores.
And what will be the medium to longer term outcome for the BNPL providers themselves? Firstly, regulation appears inevitable and, in my view, rightly so. BNPL providers will need to be prepared not just for regulatory oversight, but the costs and resources, both financial and non-financial, that are required to satisfy regulatory compliance. Secondly, and very much linked to the impact of the cost of living crisis and inflation, will the business models of the BNPL providers be able to absorb the likely increased rates of customer default?
Like high-cost short-term credit lenders before them, I suspect the buzzword for the BNPL providers will soon be ‘affordability’, and perhaps it will not only be in reference to their customers’ ability to pay.
buy now, pay later (BNPL) firms face pressure from MPs and campaigners who say they should prevent customers from taking on more debt than they can afford
