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As countries around the world deal with inflationary pressures, rising interest rates is likely to make zero-interest buy now, pay later (BNPL) instalment products more desirable among consumers, though pressures for more regulation remain.
Consumer credit was badly hit during the pandemic as people switched from spending to saving and paying down debts, with revolving credit from credit cards hit particularly hard. In the UK, figures from the Bank of England show that outstanding credit card debt was 20 percent smaller in February 2021 compared with a year earlier, whereas in the US, revolving consumer credit outstanding fell by $122.1bn during 2020, the majority of which is credit card debt.
The exception to this trend of falling unsecured credit, however, has been BNPL. Survey data from Finder claimed 88 percent of UK BNPL users said they had used BNPL services at least as much or more often during the COVID-19 pandemic and 32 percent of them saying they’ll continue to use BNPL more often. This is matched by hard data from Finder, with monthly active users for Klarna, the most popular UK BNPL provider, rising from 186,000 in January 2020 to 460,000 by June 2020, a 247 percent increase in six months.
Additionally, high BNPL growth rates are not UK specific but are prevalent throughout the world. Findings from Worldpay show BNPL achieving global growth of 32 percent between 2019 and 2020, driven by gains in North America and Europe.
History repeating itself
Although strong take-up of BNPL has been driven by ease of access to help with spending on those little luxuries, its next phase of growth could be helped by inflation.
Over the past year, inflation has surged globally, driven by increased demand meeting constrained supply. Across the US, UK and EU, inflation has reached highs of 5-7 percent and despite recent interest rate rises, is expected to continue to be above the typical target rate of 2 percent for the foreseeable future. And with higher than expected interest rates for the first time in over a decade, credit products that aren’t linked to interest rates, such as many BNPL products, are likely to appear more desirable, particularly as consumers continue to deal with the rising cost of living. This is despite the more flexible terms credit cards and other short-term loan arrangements typically offer.
Ironically, we have seen this pattern before in the credit card markets of Brazil and Turkey. Faced with high inflation and interest rates, issuers and merchants encouraged consumption through credit cards by offering interest-free instalment purchase on items. The use of BNPL is still a popular payment choice today in markets such as Brazil.
New regulatory pressures
Despite the prime conditions BNPL providers find themselves in, the spectre of regulation looms, with analysis from VIXIO in November 2021 showing jurisdictions such as the UK and Ireland are seeking to capture BNPL within existing consumer credit regulation. Other jurisdictions, including Australia, Canada, Sweden and the US have introduced new codes of conduct, investigating potential consumer harms, or have decided to monitor the market more closely.
With the serious prospect of major price rises over the next few years as central bankers battle inflation, regulators are likely to want to come down hard on easily accessible consumer credit like BNPL, in the same way that payday loans were targeted after the global financial crisis. Already the Irish Competition and Consumer Protection Commission (CCPC) has cautioned consumers who were considering using credit to help fund their Christmas expenses.
Although BNPL products do not come with the exorbitant interest rates and the potential for consumer harm that Payday loans provided, there are still important dangers and risks that policy makers need to consider. For example, a report by the Australian Securities and Investment Commission (ASIC) showed BNPL can incentivise consumers to buy more goods and services, buy more expensive items and induce more impulse purchases, all things that regulators and governments would be keen to avoid in tandem with rising interest rates and a higher cost of living. Regulators will have to balance this with any potential consumer detriment that regulating BNPL will cause. It is, after all, a potentially cheaper and less risky form of credit compared to some traditional interest-bearing forms.
Responsible lending
To take full advantage of this new economic environment, BNPL providers should pay special attention to the effect their service is having on consumers, pointing out occasions when the effect is positive and taking steps to make sure consumers are not pushed into hardship, either directly or indirectly. This point is backed up by Mike Chambers, CEO of Northey Point, who commented to VIXIO that “although we are likely to see greater regulatory attention on firms offering BNPL solutions, appropriate products, responsibly offered will find favour with the regulator.”
In the long-term, being a responsible provider of pay-later services should not only help to ensure loan quality for the firm, it will help build a strong, reliable brand, both with the firm’s consumers and especially with the regulators.
