The concept of buy-now-pay-later (BNPL) is probably as old as humanity. Businesses of all descriptions have long been happy to provide goods and services upfront to reliable customers. Now, however, BNPL is being fuelled by technology, particularly open banking and the internet. This is raising all sorts of concerns and questions about its future and how to manage it.
Why BNPL is growing so big
Cash has long since lost its place as the preferred form of payment. At present, however, its place is being fought over by several different payment methods. Debit cards and direct debits rule the roost for everyday payments. Even if consumers don’t use them directly, other payment methods often rely on them. For example, ewallets and apps often piggyback onto the payment-card networks and direct debit networks.
Debit cards and direct debits, however, by definition, only work if you have funds available. If you need credit, then your options are personal loans, credit cards and buy-now-pay-later schemes. Personal loans and credit cards both provide funds for you to spend as you wish. Personal loans tend to be used for big-ticket purchases and credit cards for smaller ones.
Buy-now-pay-later schemes are essentially small-scale personal loans offered by vendors to make it easier for customers to buy their goods and/or services. Up until recently, the practicalities of running them meant that only larger retailers could afford to support them formally. Small businesses sometimes offered informal credit for very small purchases but had to be very careful about doing so.
Now, BNPL vendors are stepping in to allow even smaller retailers to offer buy-now-pay-later. In principle, this is a win for everyone. Businesses can attract customers who need credit but can’t/won’t use credit cards or personal loans. Customers can get interest-free credit. The extra money they spend justifies the BNPL fees retailers pay. In practice, however, the situation is rather more complex.
The darker side of BNPL
Unlike credit cards and personal loans, BNPL is free to the purchaser as long as they repay the credit within the agreed timeframe. This gives it a very compelling unique selling point versus the competition. The problem, however, is that consumers who are unable to make the repayments in full and on time face being hit with penalty charges and damage to their credit record.
You could argue that this is the same as with credit cards and personal loans. That is true. With credit cards and personal loans, however, the consumer is clear about the fact that they are taking on credit and going to be charged for it. This clarity can act as a check on a consumer’s impulse to spend.
With BNPL by contrast, consumers may be more easily led into making purchases they can’t really afford and would have realised that they couldn’t afford if they had thought about it. At best, they can end up paying money they would have been better off keeping for other purposes. At worst, they can become mired in the cycle of debt.
How to manage the BNPL sector?
Up until now, the BNPL sector in the UK has largely operated in a regulatory “twilight zone”. Technically, BNPL providers aren’t offering credit so they aren’t regulated the way lenders are. This, however, is almost guaranteed to change. Quite simply, the BNPL sector has grown too large for lawmakers and regulators to continue to let it fly below the radar.
The public, social media and traditional media have all expressed concerns about the way the BNPL sector is encouraging people to spend beyond their means. The BNPL sector might reasonably argue that it’s businesses that do the encouraging. They cannot, however, dispute that their services enable businesses to encourage higher-value purchases.
It, therefore, seems likely that lawmakers will put some form of constraints on how BNPL can be used and promoted. The only real question is how far they will go. On the one hand, they will want to protect vulnerable customers. On the other hand, they will also want to push for economic growth and that means consumer spending.
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