Without doubt, breaking up and deferring payments is now a hugely popular form of credit. This is largely to be welcomed – choice is power where personal finance products are concerned, and BNPL is a great example of how innovations in the finance industry can provide much-needed flexibility or control as people seek to manage their money as per their own unique needs.
Uptake has been particularly strong among millennials, with over half of the 27-42-year-olds surveyed in a recent study by Finder saying they have used BNPL. Interestingly, however, the survey also highlighted a significant increase in the number of over-55s using this credit option; the number who had used BNPL in 2023 was double that recorded in 2022.
The ease and convenience of BNPL – often available at the click of a button at checkout on ecommerce platforms – coupled with the testing economic climate has fuelled this growth, with the Bank of England announcing that over three million households in the UK owe money via one of these schemes.
The availability of credit to allow consumers (and businesses) to fund purchases is, and always has been, a major part of the financial and banking industries. And while it was once reserved for those purchasing more considerable assets, such as houses, cars or holidays, one can now spread the cost of a Friday night takeaway or a new pair of trainers using staggered payments.
But here arises a matter for debate: there are undoubtedly ramifications involved in making credit so readily accessible – namely, we must question whether consumers, if they had to pay upfront, would still opt to follow through with a purchase.
Interestingly, the survey by Finder found that 30% of those who use BNPL services said it’s to pay for purchases they otherwise would not be able to afford. This raises important questions.
Again, it must be stressed that paying for products or services through credit is by no means a bad thing. Far from it; as noted above, credit is essential in allowing consumers much-needed flexibility when managing their incomings and outgoings.
Yet the sharp rise in the reliance on credit during the cost-of-living crisis, driven by the increasingly ubiquitous nature of BNPL solutions, could lead some people to take on debt that becomes unmanageable.
We must focus on ‘responsible credit’
Perhaps then, it is time to refocus on the idea of ‘responsible credit’. That is to say, ensuring credit is used sensibly and knowingly.
There are various means by which we can improve the credit market – fintechs, banks and consumers all have a part to play, too.
Let’s start with technology. By leveraging the immense power of artificial intelligence, we can create clearer pictures of people’s credit-worthiness; credit profiles that are far more sophisticated and reliable than current credit scoring methods.
By using AI-powered tools to analyse a person’s financial situation, we can complete credit checks that are more detailed and better able to identify potential issues. Crucially, breaking from the traditional credit agencies could better allow those struggling to get credit products – such as immigrants, students and individuals with past credit issues – an avenue into the credit market.
There is also a clear need to improve education where personal finances are concerned, particularly topics like debt and credit, including specific products like credit cards, BNPL and loans. With the multitude of offers available to the public in various forms and guises, they must have confidence that the products they are signing up for are not financial rabbit holes that end up adding to their financial problems rather than alleviating them.
Indeed, many studies in the past year or so have highlighted how many misconceptions are swirling around the BNPL industry – more transparency and education is needed.
Lastly, offering collateralised credit options, such as deposit-based credit cards, could be an effective way to help people manage their finances, especially when it comes to borrowing. The act of giving a deposit as collateral which also serves as a savings facility, may be a slightly more expensive way to access the credit market. Still, it can be a great way to build a credit rating or set a manageable credit limit.
Ultimately, during times like these, it is imperative that the finance sector – fintech startups and multinational banks alike – do all they can to protect consumers from sinking into unmanageable levels of debt.
While the cost-of-living crisis rages on and interest rates remain high, consumers’ wellbeing must be put at the forefront regarding any financial innovation, and ensuring a keen focus on responsible credit rather than ubiquitous credit is going to be of utmost importance.
Priyesh Mistry is the CEO of fintech firm Zorrz Finance, which aims to democratise access to credit products through the use of AI and alternative data.
