Insight & Analysis

Is easy credit storing up trouble?

Published: Sep 2021

It may have supported a new wave of credit over the last 18 months, but regulatory scrutiny could yet halt the march of buy now, pay later.

Buy now, pay later concept

Buy now, pay later (BNPL) is not a new development – Swedish challenger bank Klarna and PayPal have been offering it since 2014. Providers partner with retailers to give consumers the option of upfront credit which can be paid at a later date, either via a deferred payment in full or by splitting the payment across multiple fixed instalments with any interest agreed upfront and built into the repayment plan.

Interest in such products has risen sharply during the pandemic though, as fintechs have partnered with leading e-commerce retailers to offer interest-free credit at checkout.

Seven out of ten respondents to a UK consumer survey published by card issuing platform Marqeta in September expressed a preference for BNPL products and over half (54%) said they would replace credit cards use, despite more than one third only trying BNPL for the first time during the pandemic.

Capital Economics data shows that BNPL accounted for 3.6% of all online retail sales in the UK last year and was used by more than ten million people.

Banks – particularly those concerned about the loss of revenue from credit card business – have taken note. In September, Goldman Sachs announced that it would acquire GreenSky (which is described as a fintech platform for home improvement consumer loan originations) and Barclays has been beefing up its Barclays Partner Finance BNPL lending platform.

Challenger banks have unsurprisingly also been getting in on the act. Revolut is expected to launch a BNPL product next year and Monzo Flex was launched in September, giving users the option of spreading the cost of purchases over three months interest free, or over six or 12 months at 19% APR (variable).

Consumer research conducted by Capco has found that almost 30% of BNPL users earn in excess of the average UK individual annual income. However, limited requirements for credit-checking consumers before they are approved have led to concerns that unless financial regulators ensure BNPL providers are lending responsibly, debt levels could spiral among people who don’t have the ability to pay back their credit plan within the specified timeframe.

More than half of the BNPL users surveyed by Marqeta expressed concern that it was easier to fall into debt with BNPL compared with credit cards.

There is also the potential for providers to fail in what is currently an unregulated market. One of the most interesting observations from the Capital Economics report was that BNPL enabled retailers to offset the risk of late or non-payment onto providers.

The FCA’s Woolard Review published in February recommended that BNPL products should be ‘brought within the regulatory perimeter as a matter of urgency’ and stated that the emergence and expansion of unregulated BNPL products comes with significant potential for consumer harm.

The FCA noted that more than one in ten customers of one major bank using BNPL were already in arrears and the regulator’s 2021/22 business plan confirms its intention to consult on new rules for BNPL (which it refers to as deferred payment credit) next year.

However, Jason Wassell, CEO of the Consumer Credit Trade Association, suggests the FCA should be able to act more quickly to apply clear rules for firms to follow.

Debt charity StepChange has stated that although the late fees charged by point of sale BNPL firms currently appear limited, if future market conditions became less benign through competition driving down the transaction fees paid by retail firms, these fees could become a more important source of income for BNPL firms. This could drive higher costs and repeat charges and increase risks of harm for consumers.

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