Insight & Analysis

BNPL works its way down the food chain

Published: Jan 2022

While the sector continues to expand and new entrants line up, concerns remain that buy-now-pay-later (BNPL) will simply add to the consumer debt mountain.

Grassy concrete steps leading down - BNLP works its way down the food chain

The latest research to point to increased consumer use of BNPL comes from loyalty network Student Beans, which found that 42% of 16 to 24 year olds used it last year.

This trend is reflected in Experian’s latest financial data. The company attributed a significant increase in third quarter earnings to clients using its credit data services to check applicants’ debt levels.

A spokesperson for the firm told Reuters that there was growing interest in what a successful application would mean for the total indebtedness of a consumer, or information on how the consumer is handling debt.

In December, US credit bureau Equifax said it would start recording BNPL instalment plans on credit reports this year. This is a significant development since a study published by PYMNTS and Sezzle earlier this month found that 42% of respondents believed an installment plan credit product linked to their debit card that is used to make a purchase and pay it off in three or four scheduled monthly payments would improve their credit score.

Much of the coverage of BNPL has focused on its use as a means of spreading payments on more expensive items such as white goods. So when consumer finance company Zilch posted a blog suggesting customers could use it to buy a supermarket chocolate cake, it again raised concerns that BNPL was being promoted as a means of ‘having your cake and eating it’ at a time when the cost of living is soaring.

While most of the students surveyed used BNPL for clothing or gadgets, around one-in-seven said they used it for essentials such as food.

New research by consumer group Which? suggests that many BNPL users don’t realise they are taking on debt, describing it as a ‘way to pay’ or a ‘money management tool’ rather than a credit product.

Not all BNPL schemes run hard credit checks, which made some respondents feel as if they were not committing to a credit agreement. BNPL schemes are not currently regulated by the Financial Conduct Authority (FCA), which means providers don’t have to undertake a credit affordability assessment before allowing consumers to use their products.

The Which? research also revealed limited understanding of the consequences of missing payments, and of the safeguards and checks carried out by BNPL providers. Some participants were not aware there were late payment fees.

The consumer group has called for stronger safeguards to protect consumers, including steps in the checkout process to ensure people understand they are borrowing money, and warnings about the risks of using the schemes. It also wants key information - such as payment terms, late fees and the potential consequences of missed payments - to be communicated at the point of transaction, and for affordability assessments to be carried out for all BNPL transactions.

The BNPL sector in the UK recently acquired a digital banking heavyweight in the shape of Anthony Thomson, Co-founder and Chairman of Metro Bank, Founder and Chairman of Atom, and Co-founder of 86 400 in Australia.

Thomson has joined the UK board of Zip, which has been operating in the UK since March 2021, and says it has garnered more than 7.3 million customers across the 13 different markets it now operates in.

Despite concerns about how it is being promoted, Thomson is confident that BNPL will not end being perceived in the same negative light as payday loans in terms of debt acquisition. “BNPL is a nothing like payday loans,” he says. “I am old enough to remember hire purchase. For responsible borrowers, buy-now-pay-later is a useful tool for budgeting.”

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