Few payment methods have experienced such exponential growth as ‘buy now pay later’.
In a year that has kept us at home, the convenience and flexibility it offers consumers has more than trebled demand. Five million of us have spent £2.7 billion using the service since the pandemic began.
But with ease and flexibility, comes compromise. And we’ve heard instances this year of some of that pain.
Stories have emerged of consumers accidentally using BNPL at checkout, of not receiving notifications when they’ve missed a payment and even of being incentivised to use it in exchange for a charity donation. Quite rightly, these began to raise red flags with the regulator.
Two fifths of BNPL Christmas shoppers revealed in a recent survey they were now concerned about their ability to repay.
BNPL customers are younger than those typically taking on credit (a quarter are under 24 years old) and three quarters are female. The average transaction value is £70, with fashion and footwear the most popular purchase categories.
But some are making more substantial purchases, using BNPL to book holidays or for more expensive items for the home – spreading the cost over time to create manageable payments (either monthly or split into parts) in place of the upfront cost.
On the other side, we shouldn’t forget the impact on traditional lenders who offer store cards to their customers but have been subject to stricter regulation. They too will be breathing a sigh of relief as the playing field began to level last week with the FCA’s publication of The Woolard Review.
But what now?
Regulatory intention doesn’t protect consumers. Neither does sector enthusiasm. It doesn’t stop ordinary people taking out unaffordable debt and spiralling into financial difficulty.
With the FCA making it clear that it won’t be providing a prescriptive approach, the responsibility will come down to the lender to interpret the rules appropriately.
However, what is stressed is the importance, for both lenders and for the public, of high quality credit information.
BNPL lenders have stated already that the rate of change will be driven by the speed at which the three traditional credit bureaux can help, with legacy infrastructure cited as a significant blocker. The timeline for implementation, says Klarna, rests with them.
And BNPL providers are unlikely to be anything but exacting.
With exceptional user experience key to the growth of these brands to date, affordability checks will need to be as smooth as these companies’ advertising.
At Aire, we refer to this balance in credit as ‘thoughtful friction’. To meet the needs of today’s consumer, affordability assessments must be seamless and intuitive. Information must be gathered dynamically from the consumer and in real-time.
Anything less isn’t good enough. We must allow the consumer to represent themselves fairly in the process and to be heard.
Few BNPL customers today will be aware of the planned changes to how this new service that has shifted their shopping habits so much in recent years is set to evolve.
Amidst the noise, it’s important we remember the intended beneficiary here.
And if the traditional bureaux can’t rise to the challenge, it’s time for the fintechs who can.
Aneesh Varma is founder and CEO of credit fintech Aire.