Any salesperson knows that the easier you make it to buy, the more likely it is that someone will do so. In particular, the easier you can make it for someone to pay, the more likely it is that they will do so. Any debt counsellor knows that you can definitely have too much of a good thing. This raises the question of whether the rise of fintechs could spark a debt crisis.
The rise and fall and rise of credit
Credit has been around for as long as humanity – as has problem debt. A quick glance at classic literature is all that’s needed to confirm that (e.g. The Merchant of Venice). The arrival of the digital age, however, changed the game significantly. It essentially automated the lending process. This not only made it quicker. It also meant that it could be done remotely.
From the 1980s to the 2000s, the fast-credit industry grew and grew. Credit cards were ubiquitous. Payday loan companies were numerous. Even traditional “slow-credit” providers became more adventurous. For example, mortgage lenders began to offer 100% mortgages.
Then 2008 happened. Its aftereffects continue to ripple on for years. For example, it took until 2018 for Wonga to fail. At the same time, as one door closes, other doors can open. Traditional revolving credit is a thorny topic. Time-limited credit, however, is still very much alive and well under various guises.
Payment by instalments
Revolving credit in all its forms is made available to borrowers to spend as they wish. What’s more, as long as the borrower makes the minimum repayment, they can use the credit for as long as they wish. Payment by instalments is offered to purchasers to pay for a specific item. It’s therefore time-limited. It may also be offered interest-free.
There are, hence, important distinctions between revolving credit and instalment payments. At the end of the day, however, payment by instalments is still credit. What’s more, it’s credit which is becoming increasingly easy to get largely thanks to the FinTechs.
In the old days, retailers had to manage instalment payments themselves. Larger retailers might have systems in place for this or offer a “store card”. Smaller retailers might offer informal “tick”. Many retailers, however, just didn’t have the facilities to manage instalments. Now, however, they can partner with fintechs that can handle the practicalities.
Klarna may be the biggest name in this “buy-now-pay-later” space but it’s far from the only one. A quick search on “Klarna competitors” will bring up plenty of names. Some of these work on a very similar business model (e.g. Clearpay and Laybuy). Some are payment systems that just happen to make it easy for retailers to support instalments (e.g. Paypal and GoCardless).
Is credit becoming too easy again?
Ironically, there’s no easy answer to that question. In principle, offering instalment payments should be a win/win for both retailers/service providers and customers. Retailers/service providers can sell to customers when they are most in need. They don’t have to absorb the cost of credit cards or rely on the customer having access to third-party credit.
Customers can get access to what they need when they need it. They don’t need to use a credit card with its charges and temptations. They don’t need to get a personal loan. They don’t need to use up any savings they have. They don’t need to go without until they can afford an outright purchase. They can pay what they would have paid anyway but more conveniently.
That’s all so far so good. The thorny issue is whether or not easy access to credit, even payment by instalments, will lead people into temptation. Discretionary purchases are fine, if you can afford them, but dangerous if you can’t. Only time will tell if the new forms of credit will end up causing the same problems as the old ones.