As the cost-of-living crisis fuels demand for ‘Buy Now Pay Later’ (BNPL) credit, retailer backing for fully regulated BNPL products could prevent up to 876,000 Brits from getting into unmanageable debt this year, new research from Barclays and StepChange reveals.
The study shows that the rising cost of living is having a direct impact on the popularity of BNPL purchases – over a third (36 per cent) of consumers say the lending, much of which is still unregulated, has become more appealing since inflation and energy costs began to climb. Brits who use BNPL products are currently paying off an average of 4.8 purchases, up from 2.6 in February 2022, suggesting an increasing reliance on this popular form of credit.
This is also backed up by retailers – those that offer BNPL credit estimate that the lending will account for nearly a quarter (22.1 per cent) of sales by the end of 2022, rising from 18.7 per cent today. In addition, almost nine in 10 (86 per cent) say they have experienced a surge in demand for BNPL purchases since the start of the year.
However, there can be serious risks associated with unregulated lending – for example, of the three in 10 (30 per cent) Brits who have already used BNPL to purchase goods, 31 per cent say the lending has got them into problem debt, as repayments have become unmanageable. With the average BNPL user’s outstanding balance currently sitting at £254.10 and one in four (23 per cent) noting they’ve used BNPL to buy an item that they couldn’t comfortably afford, understanding the risks of unregulated lending is critical as the cost of living rises.
Retailer role in BNPL
As most BNPL lending happens during the checkout process, either in-store or online, the retailer plays a vital role in the consumer appetite for this short-term, interest-free credit. Around one in 14 (seven per cent) shoppers plan to use BNPL for the first time this year, and three quarters (75 per cent) of those say that their decision will be influenced by the retailer at the point-of-purchase.
It is therefore worrying that many retailers do not fully understand the credit options they’re presenting to customers, with the research uncovering sizeable knowledge gaps about the pitfalls of unregulated lending. Notably, more than half (54 per cent) of retailers wrongly think that most BNPL companies perform a full credit check before deciding to lend money to a consumer, and almost as many (52 per cent) mistakenly believe that all BNPL brands report their lending to the UK credit reference agencies. In addition, four in 10 (39 per cent) incorrectly assume that unregulated BNPL providers are required to follow the same rules as traditional banks and credit card companies when it comes to lending responsibly.
These misunderstandings demonstrate that retailers may have incorrectly assessed the risks associated with unregulated BNPL products, and how they may impact their customers in the long run. For example, thorough affordability checks are not required on unregulated BNPL products, and are therefore not always carried out. As a result, customers may be less likely to have sufficient funds available to pay back borrowing on time, which could lead to problem debt.
Without understanding the risks, it can be very tempting for businesses to focus solely on the commercials when selecting a finance partner, filtering providers by highest acceptance rates or lowest fees. However, in the long term this approach is counter-productive, because it overlooks a vital part of the lending process – ensuring that the lending is right for each customer, and that the amount they’re borrowing is affordable.
New regulation is coming
Encouragingly, nine in 10 (89 per cent) retailers agree that all credit providers, including Buy Now Pay Later companies, should have to follow the same rules when it comes to lending responsibly, and a similar proportion (91 per cent) say retailers offering BNPL should have a good understanding of the industry and how it is regulated. In addition, the government has acknowledged the issues with unregulated BNPL, and earlier this week announced it would publish a consultation on draft legislation towards the end of this year.
However, while the industry waits for these new regulations to be confirmed and enforced, more consumers are being exposed to potential harm. Therefore, in the meantime, Barclays and StepChange are calling on retailers to make sure they fully understand the BNPL products they’re currently offering, and that they re-assess whether those products are right for customers in the long run.
According to the new research, as many as 876,000 Brits could be prevented from falling into problem debt this year if UK retailers demanded more responsible behaviours from their lending partners, such as performing full credit checks and reporting lending to credit reference agencies, or they switched to partnering with regulated finance providers.
Antony Stephen, CEO of Barclays Partner Finance, said: “Retailers are a vital gatekeeper in the lending process and it is crucial that they perform due diligence on the BNPL products they offer. However tempting it may be to evaluate BNPL payments purely on their acceptance rates or merchant fees, they need to go further and look at how responsible the lending process is behind each transaction.
“Our research shows that the ambition is there: around nine in 10 retailers support Barclays’ view that all credit providers should be subject to the same checks and balances. Businesses such as Amazon and Apple, who have already chosen to partner with regulated providers like Barclays, deserve credit for prioritising good customer outcomes over short-term profits.”
Richard Lane, director of external affairs at StepChange, said: “The gears are grinding slowly towards consistent regulation and consumer protection between Buy Now Pay Later and other consumer credit. When it happens, this will give retailers the reassurance that their finance partners are expected to uphold the same kind of affordability approaches and forbearance strategies expected of regulated firms. In the meantime, retailers can help to protect their customers by actively managing their expectations of the firms they partner with at the checkout.
“There is rising evidence that Buy Now Pay Later isn’t just being used to buy discretionary items like fashion, but also life’s essentials like groceries. Just because it is short-term and interest-free doesn’t mean it isn’t a contributor to problem debt. Especially at the moment, with the cost of living biting, there is a high risk that people who may be struggling will turn to all available forms of borrowing to try to make ends meet. It’s therefore particularly important that adequate protections are in place to reduce the risk of borrowing turning into problem debt.”
Barclays Partner Finance has been providing regulated point-of-sale finance products and services for many years, offering interest-free and interest-bearing loans over a range of lending periods. For example, in December the company extended its partnership with Amazon to enable customers to pay in instalments on purchases of £100 or more on amazon.co.uk.
The new, flexible payment method, Instalments by Barclays, is a fully-regulated lending option where Barclays carries out a full credit and affordability check for first-time users, to ensure they are only borrowing what they can afford.