According to the Bank of England, consumer credit is at its highest rate since March 2019.

With the cost of living crisis and now the run-up to Christmas, we're expecting to see more consumers look to credit. But in particular, alternative finance and fintech BNPL providers. 

In this blog, we’ll look at how we expect consumers to weigh-up credit options, how all credit providers can support consumers, and importantly, how the less-regulated alternative credit providers (like BNPL) can manage affordability.

Let’s dive in…

BNPL versus traditional credit: How consumers are predicted to behave

Despite the current climate, 14% of lower-income consumers are planning to go into debt to afford their Christmas shopping, with an additional 10% of those earning between £22,000 and £50,000 also planning to do so too.

Consumers who’ve already been declined traditional lines of credit are more likely to turn to alternative credit like BNPL. 

In fact, according to recent research from Freedom Finance, nearly half of all adults (46%) said they wouldn’t apply again for a loan or credit card if they were declined, which makes fintech BNPL providers an attractive option.

What’s more, existing BNPL customers, who are already struggling with payments, might seek other alternative finance to pay off BNPL debt. 

Actually, Credit Union loans have hit record highs, reaching £1.87bn (15% more borrowing compared to the same quarter in 2021), as consumers struggle to find competitive interest rates or shorter terms.

Overall, we're expecting more and more people to use alternative credit including fintech BNPL providers, and as a result they will be conducting a much greater volume of bureau checks.

Where traditional and alternative credit providers are united

In short, it’s somewhat of a balancing act for all credit providers, both traditional and alternative. 

Whilst the credit sector has a duty of care in these difficult times, providers must be confident that individuals meet affordability criteria.

Furthermore, only lending to prime customers isn’t an option. 

Access to credit can cause major issues for those already struggling with the cost of living.

The bottom line: All credit providers need to keep lines of credit open for inclusivity and to support the most financially vulnerable (most impacted by the cost-of-living crisis). But, as always, they are responsible for ensuring affordability by assessing all current lines of credit. The challenge is, not all lines of credit are being reported which makes true assessment difficult. Additional searches and Open Banking data can play a key part here.

How fintech BNPL providers can support consumer affordability

BNPL usage has doubled in the last 12 months, with 14% of UK consumers expecting to use this payment method to cover shopping for gifts and food this year.

Even though current regulations in this area are weak, fintech BNPL companies will need to start doing more in-depth credit checks to protect consumers and to minimise losses. And this is where the bureaux will charge more. BNPL providers cannot afford to pay high onboarding costs and if the additional costs are not optimised, it will simply kill the model. 

The good news is that there are specific things fintech BNPL providers can do to support affordability assessments and prevent overpaying for credit checks.

Here are four best practice steps you can follow:

Step 1: Work alongside bureaux

Fintech BNPL providers should look to supply all the Bureaux with their payment data as soon as possible rather than wait for the regulator to make it mandatory. This will ensure all credit providers are making lending decisions based on accurate and up to date affordability data.

Step 2: Liaise with bureaux on pricing

Ask for pricing to cover the more in-depth credit checks to highlight risk and identify  vulnerable customers.

Step 3: Liaise with bureaux on innovation

See what can the bureaux offer in terms of Open Banking solutions to aid affordability and risk assessment.

Step 4: Leverage data benchmarking

Benchmark the offer pricing to ensure costs are not inflated. We’ve seen prices inflated by up to 500%! That’s millions being overspent, allowing competitors to offer more favourable rates to their customers. 

Wrap up

With the Christmas season about to go into full swing, widespread debt paints a negative picture for UK consumers. That’s why it’s imperative for all credit providers to keep the costs of credit low and inclusive, and ensure affordability criteria is met by leveraging as many data sources as possible.

Key takeaways:

• Look to bureau innovations, like Open Banking, that support fairer and more inclusive assessments.

• If you’re a fintech BNPL provider, sharing payment data with the bureaux supports more accurate affordability assessments for all.

• Review the cost of your current bureau contracts to see if cost-savings can be made and passed on to consumers.