British challenger bank Monzo is plotting a move into the buy now pay later (BNPL) market, amid exploding demand for the services since the onset of the pandemic.
The digital bank is reportedly prepping to announce the launch of a new BNPL product as soon as next week, the Evening Standard first reported, making it one of the first regulated banks to start providing the services.
Monzo is also reportedly planning to carry out affordability checks on customers using its BNPL services and share data with credit checking agencies – features not many competitors currently provide.
A source close to Monzo’s BNPL project said it would feature affordability checks for customers – something rivals generally do not require.
Data will also be shared with credit checking agencies to give other lenders a full picture of people’s debt positions. Monzo declined to comment on the plans.
It comes just three days after rival challenger bank Revolut announced it is launching its own product to rival sector pioneers ClearPay and Klarna, as fintechs rush to capitalise on clear signs that online shopping is here to stay post-pandemic.
David Brear, CEO of consultancy 11:FS, predicted the move will boost the digital bank’s finances and “pushes Monzo beyond just discretionary spending to really helping people with many parts of their increasingly complex finances.”
“We have been waiting for Monzo to get into the bit of banking that makes it all worth doing – and that’s lending in all its forms.”
“Monzo has always been a customer-led bank and it needs to ensure it delivers this in a way that helps customers, including vulnerable customers, to manage and improve their financial well being.”
Some 5m Brits have used ‘buy now, pay later’ since the start of the pandemic as the size of the UK market quadrupled last year to reach £2.7bn, according to the FCA.
Klarna was the first firm to debut the payment method in 2005 and now serves more than 14m customers and over 13,000 retailers in the UK, having recently scored a $45bn valuation.
Other leaders in the crowded market are PayPal, which has stopped charging late fees when customers miss payments on purchases in an effort to attract customers amid booming market competition, Afterpay and Clearpay.
BNPL enables buyers to delay payment with no incurred interest, for up to 30 days after purchase, or alternatively to spread repayment across six weeks to four month installments.
But the BNPL sector has raised eyebrows amongst global regulators and come under fire from campaigners warning that it can encourage consumers — particularly younger shoppers — to rack up debts.
The sector is not currently regulated and relies on an exemption from consumer credit rules, though this has led to inconsistent practices.
In the UK, where the use of BNPL transactions tripled in 2020, the Financial Conduct Authority (FCA) has said it plans to regulate the products and bring in new rules, including forcing providers to carry out affordability checks.
But the consultation has been expected for months, moving at a much slower pace than companies are innovating in the space.
According to recent research by consumer rights group Citizens Advice, one in ten UK shoppers who choose to pay for products using buy now pay later have been chased by debt collectors.
The proportion of buy now pay later (BNPL) shoppers that have received contact from or been referred to debt collectors rises to one in eight amongst 18 to 34-year-olds, who have been particularly keen to adopt the form of credit.
Crucially, the new research found that only 11 per cent of BNPL services warned shoppers they were taking out a credit agreement. The remaining 89 per cent included this information in small print or in the T&Cs.
Citizens Advice called for regulators to urgently address the sector and crack down on services to ensure consumers are clearly notified that they are entering into a formal credit agreement.
Dame Clare Moriarty, Chief Executive of Citizens Advice, said the warnings should be “unmissable.”
“The Buy Now Pay Later industry has exploded and we need consumer protection to keep up with the changes in the way we live. We hope the Treasury can keep pace,” Moriarty said.