As credit payments continue to evolve and provide a space for innovation, Tymit CEO Martin Magnone joins Payment Expert for the latest edition of the Innovation in Payments series as he emphasised the importance of ‘jumping off the irrational credit bandwagon’.
The credit revolution is booming. Paying in instalments at the point of sale has exploded in popularity, driving topline growth across retail and beyond. In the UK, 17 million consumers have used ‘Buy Now, Pay Later’ instalments, with 37% of 25 to 35 year olds using BNPL twice or more each month.
This surge in using BNPL instalments is expected to continue as the prospects for traditional forms of credit grow dimmer – less than one in five (12%) 18 to 21 year olds now hold a credit card after one year. The confusing costs, hidden fees and ballooning balances of traditional credit cards are driving them away.
And with the economic backdrop in the UK looking pretty dire as we enter a new year – UK household disposable income has fallen by 3.8% – it’s no surprise we’re seeing a drive for finance with a difference. Undeniably, consumer appetite for ‘old credit’ is waning and many are turning to BNPL to try and bridge the gap between earnings and living costs – driven by a need for financial flexibility the traditional finance options simply lack.
The unsustainable side of BNPL
Given both the challenging economic picture and its ease of use, it’s understandable why millions of people have turned to BNPL. But in its current incarnation, BNPL isn’t sustainable for consumers in the long-run.
A lot of commentary has been published on how, particularly young people’s use of BNPL can lead to poor credit ratings and high levels of bad debt. We know regulation is finally on the way, but the immediate problem still remains – the majority of BNPL providers are failing to run the necessary and appropriate credit checks before providing consumers with the credit needed to make purchases using their service.
What should be a flexible, transparent and helpful form of credit in the cost of living crisis has become irresponsible. We now have an environment where some consumers are unable to pay instalments back and are forced down a road of racking up high interest repayments, pushing them into debt and creating unsustainable losses.
It’s important to note that for those consumers who have undergone the appropriate credit checks and can afford it, paying in instalments is a convenient way of spreading the cost of a large purchase. But this is sadly becoming the exception, not the rule. The reality is that many consumers still need much more clarity and transparency around the true upfront costs associated with BNPL and how they can manage their financial commitments with ease. As of yet, these needs have been largely ignored.
BNPL isn’t helping merchants either
The other side of the coin which can’t be ignored is the impact BNPL is having on merchants. Undeniably, many have struggled to stay afloat over the last three years with multiple lockdowns and global supply chain disruptions. While many have jumped on the BNPL bandwagon to capitalise on the potential sales boost to drive growth, low margins combined with the high fees charged by BNPL providers are pricing merchants out of the point of sale boom.
Subsidising 0% interest instalment offers remains a step too far for many in an uncertain economic environment. And even if they can stretch to cover the extortionate fees – at an average of 2-8% – in return they are forced to put their own brand on the backbench during the payments journey. And post-purchase risk losing control of their customers’ journey altogether.
Those brands who have accepted BNPLs will eventually help transfer their customers over to irresponsible credit. We are also already seeing the real possibility of merchants having their role significantly reduced and being pushed to the sidelines, especially by big BNPL providers.
2023: the year of responsible credit instalments
There has and always will be an underlying need for credit. BNPL is simply the latest manifestation of this need and there is hope for 2023. Brands can stand in solidarity with their customers by showing them and existing BNPL providers that it’s time to jump off the irresponsible credit bandwagon.
Responsible credit will take the form of next-generation instalment programme providers who give both consumers and merchants control and transparency. Merchants will be able to offer the new way people love to pay in a way that’s responsible, while working with providers to own the instalments experience themselves. And consumers will be able to purchase in instalments, knowing it’s both responsible and flexible.
This evolution will take the best from the first incarnation of BNPL, leaving its mistakes behind, to establish instalment programs as flexible forms of payment that consumers can trust.
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Innovation within payments will be explored in greater detail at this year’s SBC Summit Barcelona, which takes place from the 19-21 of September, playing host to an unrivalled speaker line-up of 450 industry professionals. To find out more about the event, click the banner below.
