Buying Now, Paying Later (BNPL) is serious business.
Fintech companies are popping up at a relentless pace, offering interest-free installment online shopping refunds.
The typical shopping experience, say on a pair of £ 30 shoes, looks like this:
- Klarna offers you to pay in three monthly installments of £ 10.
- Laybuy says you can spread this out over six weeks, £ 5 at a time.
- Clearpay has another option, deferring the entire £ 30 for a month.
You don’t need to go through a credit check, and with just a few clicks, your new kicks are in the mail without making a dent in your bank balance, a short-term gain while deferring the pain.
It all seems so simple, so easy, and so practical – yet there is a glaring problem that may not make waves until the tide is too big to stop.
BNPL is looming disaster?
BNPL providers do not charge any interest, but note that this does not prevent them from collecting late fees. After all, they need to make money, don’t they?
However, because they are not loan providers, they fall outside the standard remit of credit regulators. Regulation through the Financial Sector Conduct Authority (or another national regulator depending on where you live in the world) is crucial for consumer protection.
Without it, a BNPL provider has no obligation to monitor affordability or take responsibility for inappropriate loans. This is the reason why so many industry professionals are expressing their concerns about the severity of a crisis BNPL could cause.
What we have here is a potential disaster, in which unregulated lending takes place through millions of microtransactions, with some buyers buying thousands of dollars worth of goods, far beyond their repayment capacity.
The danger of unregulated loans
Fortunately, we have a real-world case study of how unregulated short-term borrowing can escalate into a debt epidemic.
Wonga, a household name in the financial industry and accustomed to controversy, was initially launched as a payday lender in the 2000s, offering individual lines of credit through online apps to people waiting for their next credit report. pay.
Regulation of the industry was limited at the time, as the innovation of online payday loans was so recent in the market that it was not (yet) within the scope of the respective national regulators.
Hundreds of competing vendors joined the wave, and as the competition intensified, more and more lenders became particularly lax when they incorporated eligibility checks, credit reports and credit reports. other consumer protections.
Basically, lenders were too open about who was eligible for loans and for what amount. This meant that consumers had too easy access to credit that they would have a hard time paying back on top of the interest. Payday loans bypassed the legislation in effect for all other forms of personal loans available at the time.
The fallout was huge, with thousands of clients trapped in debt spirals because they were unable to repay their loans. The situation ultimately prompted credit regulators to act with sweeping reforms that capped loan amounts, maximum repayments and resulted in millions of pounds being clawed back by customers. Payday loans as a credit product have all but disappeared from the market, with UK giants like Wonga and Quick Quid disappearing within months.
Protect consumers thanks to BNPL regulations
It is easy to assume that the problem lies in the fact that people take advantage of easy credit knowing that they cannot make the repayments. However, it is not that simple.
The majority of BNPL products are:
- Taken by young people without the financial maturity to make informed decisions.
- Not clear on penalties or late payment fees.
- Available to any applicant, even if they are extremely indebted.
Banks and financial institutions highlight another issue where BNPL loans are not reported on buyer’s credit report.
A credit card lender can happily approve an application, with all the necessary checks, without knowing their new customer is signing up Following short-term loans to meet the substantial repayments from BNPL.
So, will BNPL become a regulated financial product in the near future?
We certainly hope so. Because, if not, the impact on millions of consumers, and the financial sector as a whole, will be enormous.
Watch this space for updates!