BNPL could be the next payday loan fiasco expert


Buy Now, Pay Later (BNPL) is serious business.

Fintech companies appear a relentless pace, offers tiered online shopping repayments with no interest.

The typical shopping experience, say for a pair of shoes worth € 30, looks like this:

  • Klarna offers you to pay in three monthly installments of £ 10.
  • Laybuy says you can spread that over six weeks, £ 5 a time.
  • Clearpay offers another option to defer the entire £ 30 for a month.

There’s no need to do a credit check, and with a few clicks, your new kicks are in the mail with no drain on your bank balance, short-term profit while you postpone the pain.

It all sounds so simple, so simple and so handy – yet there is one glaring problem that may not ripple until the tide is too big to last.

IS BNPL an impending disaster?

BNPL providers don’t charge interest, but that doesn’t stop them from charging late payment fees. After all, they have to make money somehow, don’t they?

However, because they are not lenders, they do not fall under the roles of standard credit regulators. Regulation by the Financial Sector Conduct Authority (or an alternative national regulator, depending on where you live in the world) is vital to consumer protection.

Without it, a BNPL provider is under no obligation to monitor affordability or take responsibility for improper lending. This is why so many industry experts have raised concerns about how deep a crisis from BNPL could be.

What we have here is a potential catastrophe where unregulated lending occurs through millions of microtransactions and some buyers buy thousands of dollars in goods that are way beyond their ability to repay.

The danger of unregulated lending

Fortunately, we have a real-world case study of how unregulated short-term borrowing can turn into a debt epidemic.

WongaA household name in the financial industry and no stranger to controversy, it was first introduced as a payday loan provider in the noughties, offering customized lines of credit through online applications to people waiting for their next paycheck.

There was limited industry regulation at the time as the online payday loan innovation was so fresh to the market that it did not (yet) fall within the scope of the respective national regulators.

Hundreds of competing vendors joined the surge, and as competition intensified, more and more lenders became particularly negligent in incorporating proficiency testing, credit reports, and other consumer protection measures.

Essentially, lenders were too open about who was eligible for credit and how much. This meant that consumers had too easy access to credit that they would realistically find difficult to repay on top of the interest. Payday loans bypassed the applicable laws for any other form of personal loan that were available at the time.

The consequences were significant as thousands of customers were caught in a spiral of debt from being unable to repay their loans. The situation finally caused the credit regulators to act with far-reaching reforms that limited loan amounts and repayment maxima and resulted in millions of pounds being reclaimed from customers. Payday loans as a credit product practically disappeared from the market, while British giants like Wonga and Quick Quid disappeared in a matter of months.

Consumer protection through BNPL regulation

It is easy to assume that the problem is that individuals are taking out a simple loan knowing they will not be able to make the repayments. However, it is not that simple.

Most of the BNPL products are:

  • Taken out by young people who do not have the financial maturity to make informed decisions.
  • Unclear about penalties or fees for late payments.
  • Available to any applicant, even if they are extremely in debt.

Banks and financial institutions point out another problem where BNPL loans are not shown on the buyer’s credit file.

A credit card lender might be happy to approve an application with all of the required checks without knowing that their new customer is closing more short-term lending to keep up with significant BNPL repayments.

So is BNPL going to become a regulated financial product in the near future?

We definitely hope so. Because if it doesn’t, the impact on millions of consumers and the financial sector as a whole will be enormous.

Watch this area for updates!

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