Samantha Fogerty, chief operating officer of Payl8r.
As Buy Now, Pay Later (BNPL) services become increasingly popular for everyday purchases, we have a responsibility, as fintech leaders, to ensure our practices do not contribute to economic issues for financially vulnerable people. As of 2024, half of UK adults have used BNPL services, which refers to unregulated interest free loans normally three months or less. This exponential growth in the sector, which is only set to continue with the ongoing rise in the cost of living, leaves providers no choice but to work alongside regulators to make BNPL more sustainable. Regulations, social inclusion and education will all enhance sustainable and ethical lending.
Risk management and regulation
With an increasing number of financially vulnerable consumers, it is now more important than ever for BNPL providers to have robust risk management strategies. Customer’s creditworthiness should be comprehensively assessed before approving a purchase and setting appropriate credit limits, which can be assisted by open banking. By using real-time financial data, not just outdated financial records, this method gives customers more control over their financial data and provides equal opportunity to apply for financial services.
Proportionate FCA regulation incorporating Section 75 liability is on the horizon, which could cause issues for retailers that may be left to absorb the higher fees that will inevitably come from enhancing checks and handling Section 75 complaints. This could lead us to see a decrease in retailers offering BNPL at check out. However, without regulated lending, many customers will continue to borrow while already having multiple existing unpaid loans. This method of lending is not sustainable, as it will inevitably lead to spiralling debt. If industry and government can balance protection for consumers with a viable commercial model for lenders, a sustainable future for both parties will be created.
Social inclusion will foster sustainable finance
While broader credit assessments are necessary to make BNPL services more sustainable and ethical, We must also mitigate the risk of financial inclusion in the process. There are instances in the subprime market where people haven’t intentionally missed a loan payment, for example, they could have moved addresses or changed email. Despite the individual being financially capable, they may still be labelled as ‘subprime’.
And while BNPL has been praised for promoting financial inclusion, it is important to remember that allowing a wide customer market to take out short-term, low-cost loans with ease doesn’t necessarily reflect this. With one in five people using BNPL for essential purchases, access to ‘quick and easy’ loans may encourage further borrowing on top of existing debt.
BNPL should remain as a force for good, but there is a need to carry this out responsibly. Bringing in regulation should not exclude subprime and non-prime markets. Lenders should ensure open banking is used to access affordability along with assessing creditworthiness. This way, lenders can implement regulation that protects the customer, as well as ensuring customers that can afford to take out the loan but may have a thin or imperfect credit file, aren’t excluded. This also helps lenders commercially as suitability is about having sustainable commercial models, as well as benefitting customers.
Going further to promote social inclusion, flexible payment options should be offered. Pricing the consumer’s loan based on the their repayment abilities allows lenders to promote financial inclusion safely and sustainably.
Transparency and education
Despite BNPL being the fastest-growing online payment method in the UK, there is still a lack of awareness surrounding this service. A staggering 44% of BNPL users agreed that BNPL services do not qualify as debt. The lack of education around unregulated BNPL and debt implications should be addressed to prevent over-indebtedness.
It should not be a question for BNPL lenders to be transparent with consumers. It is the ethical responsibility of fintech leaders to clearly communicate conditions and repayment schedules. This empowers customers to make informed decisions and avoid unexpected financial burdens to foster a more sustainable financial future for both the BNPL industry and consumers.
As the rise in the cost of living heightens and household incomes are increasingly squeezed, regulations, social inclusion and education are all needed for the financial wellbeing of BNPL users. Although regulations may increase costs for providers, without change, a sustainable future for BNPL cannot be secured. Collaboration between fintech leaders and regulators, alongside more education of their customer base, will strengthen responsible lending. Transparency across the sector is integral for setting a sustainable and more ethical path for BNPL.
