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The dark side of fintech: BNPL’s negative impact on financial well being

The fintech industry has played a big part in delivering more financial services to the masses, but when it comes to innovation and having a positive impact on consumers - not all is created equal. 

Buy Now Pay Later (BNPL) is a case in point. This alternative source of payment method, which enables consumers to break up purchases into manageable instalments, has made it easier for people to buy on impulse, but the pain of purchase can be felt further down the line as consumers struggle to make their payments. 

Almost a third of the UK’s 10 million BNPL users reported that their repayment plans are unmanageable, according to Barclays in February 2022, driving home the destructive nature of BNPL during the cost of living crisis. 

With aggressive collection practises and absent affordability checks, unregulated BNPL giants could tarnish fintech’s legacy.

BNPL’s Impact on Consumers

BNPL can trace its roots to Stockholm in 2005 with Klarna, re-inventing the options available during checkout at online stores. The BNPL proposition enables consumers to split payments up into smaller instalments, typically three payments over three months, opening a credit line without the same affordability checks carried out by traditional lenders/credit cards. 

The advent of BNPL, an industry still dominated by fintechs, has had a positive impact on some consumers, enabling them to split large purchases up over multiple paychecks. This source of credit is available to consumers with low credit ratings, helping them to bridge paychecks and break up large purchases in the absence of banks and traditional lenders. In addition, the short-term line of credit is initially interest-free, providing savvy consumers with an additional financial tool as they manage their budgets.

However, BNPL providers often negate the benefits of accessible short term lending with aggressive collection practises. Following the initial 0% APR period, BNPL providers hike up rates, greatly inflating the outstanding loan amount. BNPL providers also routinely report late payments to the Credit Ratings Authority (CRA) straight away, causing an impactful decrease in credit rating without reasonable attempts to recoup the funds from the consumer.

Unfortunately, consumers are often unaware of the terms they are agreeing to when taking out BNPL loans at checkout. Displayed via a simple pop-up, providers utilise a low-friction experience and avoid the words “loan” or “credit”. These tactics are utilised to separate BNPL from mainstream credit providers, convincing more consumers to take out loans.

In addition, BNPL currently resides outside of consumer credit regulation, enabling providers to issue loans to vulnerable consumers with bad credit histories. The government has recognised this issue and has promised to increase regulatory oversight of BNPL with fresh legislation, but the Treasury recently shelved the fresh regulations as BNPL providers threatened to leave the market entirely. 

Lack of BNPL regulation has incurred a significant impact on UK consumers; states that over 36% of UK consumers (19+ million) have used BNPL services, demonstrating the breadth of this issue. Statista reported that the average monthly debt accrued by BNPL users aged 18-34 is  £191, exceeding the average monthly savings rate of £180 (Nimblefins) - meaning that the average young BNPL user is completely unable to build their savings due to suffocating BNPL debt. 

How Fintechs are Supporting Consumers

It’s clear to see that widespread usage of BNPL services is detrimental to the financial wellbeing of many UK consumers, often leading to ill-advised high-cost borrowing and hampering their ability to save for their future. Fintechs focused on educating the general public on issues including predatory lending have an important role to play, reducing the proportion of customers susceptible to BNPL prompts at checkout. They’re also educating people about savings accounts, budgeting and more, having a real-world impact on the finances of millions across the country. A recent report by lender Creditspring stated that 31% of all UK citizens, and 51% of 18-34 year olds, are unaware that BNPL usage could lead to debt, highlighting the urgent need for further financial education.

Increased financial visibility also aids consumers as they evaluate the ever-growing range of financial tools available to them, providing oversight of all outstanding debts and open accounts. Utilising automation, open banking, machine learning and more, fintechs are finding new ways of supporting individuals in their journey to financial wellness. 

Households in the UK are under extreme financial pressure, fighting rising inflation and interest rates to balance their budget. The presence of unregulated BNPL lenders at checkout is making the task more difficult, providing another slippery slope for vulnerable consumers to fall down. However, in the absence of government regulation, fintechs are stepping up to support consumers, utilising increased visibility and education to improve individuals’ relationships with their finances.




Comments: (5)

Ketharaman Swaminathan
Ketharaman Swaminathan - GTM360 Marketing Solutions - Pune 14 August, 2023, 09:57Be the first to give this comment the thumbs up 0 likes

Lame post.

People need loan. Banks won't give them credit card or personal loan or consumer loan. Before BNPL, people went to loansharks and paid usurious interests and / or had their knees capped. 

Now people sign up for BNPL. They get free credit for a certain period unlike loanshark or any other credit product and hopefully don't have their knees capped if they delay repayment. To me, that sounds like BNPL is providing a yeoman service.

Like all other products, obviously people have to read and comply with T&Cs. It's silly to claim they didn't realize it was a loan. When they bought stuff without paying, did they think it was a gift from Store or God?  

Kudos to UK pols for doing the right thing by leaving BNPL to market forces.

BNPL must be compared with loan products that people will get from loan sharks, not credit card and other loan products that people won't get from banks. 

PS: BNPL was pioneered in USA in ca. 2004 by Bill Me Later, not Klarna in Sweden. BML got acquired by PayPal a few years later. 

Maysam Rizvi
Maysam Rizvi - Elifinty - London 14 August, 2023, 10:56Be the first to give this comment the thumbs up 0 likes

Thanks for your comments, always love a lively debate. 

I think you're missing the point. I agree, BNPL does provide liquidity in a market where there is rarely any. It also very cleverly avoids regulation by not having lending or loans or debt in their language. 

The challenge is ultimately that people who use it still face the same issues, they are challenged financially, they have low financial literacy and when a "lending" product presents itself as anything but and then when you face repayment issues treats you as a bad customer with penalty rates and reports to credit beaurues. The end result is the same, you end up destroying any chance of that individual borrowing cheaply in the future and ultimately have to resort to debt advice and recoveries.

With a rise in use of BNPL for buying essentials should be sending alarm bells for the economy. 

Having been on your side of the fence, I must admit to having some prvilege bias and expecting all customers to be knowledgable and understand the contracts they get themselves into. Being on the other side I can admit it is not always the case.

We know poverty premium is real, poorer in society pay more to access the same services and we need to be aware of the intended and unintended consequences of financial products. 

I'm not saying there should be more regulation, I'm saying treat your customers with care (beyond the point where they can afford your products) and if you can't then you need to be regulated and told to care for your customers like all the incumbent lenders that don't understand how to treat a customer with care and need the Duty of Care to tell them. 

Ketharaman Swaminathan
Ketharaman Swaminathan - GTM360 Marketing Solutions - Pune 14 August, 2023, 11:28Be the first to give this comment the thumbs up 0 likes

"If you can't do the time, you shouldn't do the crime". Likewise, if you can't repay, you should not borrow. Period. That's the only point that matters. All else is diversion tactic.

Grabbing BNPL when they got it and then conveniently claiming they didn't know it was a loan when they had to repay it is height of irresponsible consumer behavior that must be curbed immediately.

Regulators have chosen wisely not to go after BNPL providers. Instead, they should go after BNPL borrowers and mete out harsh punishments if they fail to repay BNPL installments.

Maysam Rizvi
Maysam Rizvi - Elifinty - London 14 August, 2023, 16:15Be the first to give this comment the thumbs up 0 likes

Ketharaman, Lets agree to disagree. 

I feel sellers of products and services have a shared responsibility. Car manufaturers are responsible for faults in the vehicles, finance providers are similarly responsible. 

Thanks for amazing comments. 

I'm keen to hear other views as well. Do you agree or disagree. 

Ketharaman Swaminathan
Ketharaman Swaminathan - GTM360 Marketing Solutions - Pune 14 August, 2023, 16:42Be the first to give this comment the thumbs up 0 likes

Of course, finance providers are responsible for faults in their products, but I see no fault in BNPL products.

Every ecommerce website references BNPL method of payment in one of the following ways which make it clear that it's meant to be repaid: "Pay in 5", "Pay in EMI", "Pay in Installments". Every BNPL contract I've seen clearly spells out repayment schedules.

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