Defusing the ‘BNPL’ Time Bomb.
More than 3 million households in the UK collectively owe £2.7 billion on ‘buy now, pay later’ (BNPL) borrowing, as per an analysis conducted last year by economists at the Bank of England.
Source: https://www.bankofengland.co.uk/agents-summary/2023/2023-q4
These findings highlight the prevalence of this currently unregulated practice, particularly among young individuals aged between 25 and 34, confirming the Bank’s concerns regarding the impact on financially vulnerable young individuals and the potential long term risks associated with the innovative new form of credit.
It’s evident that a significant proportion of these BNPL users may not fully comprehend the financial implications of their borrowing decisions, raising alarms about the potential consequences for borrowers. This is especially pertinent for young adults and those lacking the financial literacy to fully appreciate the hazards of short term credit borrowing.
Stella Creasy, Labour MP, advocates for stricter regulation in response to these concerns, emphasizing the need to address the risks posed by BNPL borrowing before it escalates into a crisis akin to previous scandals in the financial sector, such as those seen during the hay day of the payday loan industry.
Sweeping global reforms to the payday loan industry led to a culling of dodgy lenders internationally and those that survived did so because their core code of practice prioritised safe and responsible lending. This is mutually beneficial, explains Brett Van Aswegen, director of Wonga Online.
“there was a golden opportunity for lenders to galvanise their service as responsible, fair and sustainable. Wonga’s financial education initiatives like the Money Academy and our transparent codes of practice foster long-term greater financial inclusion to the benefit of both lender and consumer”
Could BNPL benefit from similar regulations? The analysis, conducted by Bank of England economists Gerry Gunner and James Waddell, draws on data from a survey conducted in March 2023, revealing that 11% of UK households, equivalent to 3.1 million households, reported owing money on BNPL schemes.
While many users reported owing relatively small balances, some individuals reported owing substantial sums, contributing to the cumulative debt of £2.7 billion. Younger individuals and renters are disproportionately represented among BNPL users, reflecting their potentially less resilient financial circumstances. Furthermore, BNPL users exhibit higher levels of concern about their borrowing compared to other borrowers, indicating heightened financial stress.
BNPL borrowing is associated with a higher likelihood of falling behind on repayments, with a significant portion of users reporting instances of arrears. While BNPL schemes offer flexibility in repayments, they may also pose risks, particularly for those who struggle to manage their finances effectively.
Although BNPL services are often provided by fintech start-ups and are not regulated in the same way as traditional credit products, some established lenders offer regulated BNPL products with interest charges. However, there is limited publicly available data on BNPL usage, reflecting the challenges associated with regulating this sector effectively.
Major players in the BNPL market, such as Klarna, boast millions of UK customers, highlighting the widespread adoption of these schemes. Despite their popularity, concerns persist regarding the lack of clear information provided to consumers about the risks associated with BNPL borrowing.
Consumer advocates, including Rocio Concha from Which?, stress the importance of regulation to safeguard consumers from the potential pitfalls of BNPL borrowing, emphasizing the need for greater transparency and consumer protection measures in this rapidly growing sector. If all goes to plan a form regulation should be coming within the next 12 months however there has been discourse as to whether this going ahead or not.
