Is the cost of living crisis a blessing or bombshell for BNPL?

Annie Paul and Tim Lines

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Buy-now-pay-later (BNPL) is quickly changing the face of consumer finance. If used correctly, BNPL has many benefits for consumers, including convenience, efficiency, and customer experience. Younger people in particular are embracing the chance to alleviate their financial pressures by staggering payments through installments. 

From a business perspective too, everyone is entering the BNPL arena – traditional banks, retailers, fintechs and more recently, even tech giants. While it has been around for years – Klarna was established in Sweden in 2005 after all – we now have a perfect mix of consumer demand and understanding; and the innovation from key B2C and B2B players to realise its potential.

However, danger and risk are threatening its continued rise. Inflation is at its highest rate for about 30 years, and it is about to accelerate even further throughout April, causing more and more people to fall into debt as they struggle to pay bills. The majority of people up and down the country are feeling the pressure, not only from the energy prices that are fuelling the rise in living costs, but also from the likes of consumer goods and fuel prices.

As the rise in the cost of living squeezes wallets, does BNPL become a blessing or a bombshell? And reputationally, does it face an uncertain future?

Approach with caution

Understandably there is a degree of caution surrounding BNPL, notably with credit bureaus now considering factoring it into credit records. And it’s increasingly clear that those who are financially vulnerable are at higher risk of falling into debt, especially when they start using BNPL schemes for essentials such as groceries. 

Record rises in the cost of living have accelerated these concerns, and what was once seen as a ‘godsend’ payment solution has morphed into something a lot more complicated for many people who are struggling financially.

Our own research surveying 2,010 GB consumers found that over half of 18-24 (52%) and 25-34 year olds (53%) admit they are less confident at making their BNPL payments following rising prices and living costs. 

However, we also found the consumer appetite for BNPL is still prevalent, with over half of  18-25 (60%), 25-34 (57%) and 35-44 (53%) year olds feeling that BNPL is a great option when they are short of cash. As well as this, almost 1 in 3 (29%) say they are “more likely” to use BNPL in 2022 than last year. 

This demonstrates that while the rise in living costs is causing a lack of confidence amongst consumers, the demand for this payment solution prevails; and will continue to grow in the foreseeable future. It is a powerful innovation and can bring about enormous consumer benefit. The industry needs to tread softly and appreciate that at this time, when life is getting harder, it is more important than ever to act responsibly and gain trust. The industry must not be seen to capitalise on consumer desperation. 

Responsibility of regulation

In the short term, the industry is still unregulated. So BNPL providers will be under the spotlight. Lots of attention will be on how and when the UK will regulate BNPL products. Attempts have already been made to prevent users from delaying payments for too long and encourage responsible spending. For example, Klarna’s rewards programme allows consumers to earn points every time they use the immediate payment option or make an on-time repayment. Acts of compliance will be fundamental in making the payment option more appealing and trustworthy for consumers. This is especially the case for those BNPL providers that are now in direct competition with banks that are compliant by default. 

BNPL providers that welcome regulatory intervention with open arms will earn their reputation. Doing this ahead of the enforcement will help win over both consumers and regulators. The PR priority right now is to build reputation and recognition for responsible lending; and to understand that the cost of living crisis represents more danger than opportunity for BNPL players. 

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Walnut Unlimited conducted a nationally representative omnibus survey of 2,010 adults across GB between 23rd and 25th March 2022. The figures have been weighted and are representative of all GB adults (aged 18+).