%20(transparent%20bg).png){kind=spacer}
Photo by Lucrezia Carnelos on Unsplash
There are many BNPL businesses providing similar services making it easier than ever for people to use and pay through a BNPL option.
In this article, we will be exploring the other side of BNPL options and how that can impact the financially vulnerable, plus, the history of the buy now, pay later services that came before the fintech giants.
The history of layaway
Layaway walked so that BNPL could run.
Layaway, created in the Great Depression in the 1930s was targeted to consumers with limited disposable income and unable to make larger lump-sum purchases. Sometimes a fee would be kept by the seller who would keep the item in storage until the payments were completed, eliminating risk from the seller-side for buyers who might default on their payments. In that case, the customer’s money may either be returned in full, forfeited entirely, or returned minus a fee.
Other upsides for customers included no mark on their credit score as many of the agreements were done verbally and in writing, and you did not need to prove that you were creditworthy to get a layaway plan.
Very popular in the US and in the UK, due to the dawn of credit becoming more readily available, layaway programs started to decline in the 1980s. However, in 2011, WalMart briefly resumed the service to alleviate the financial difficulties brought on by the Great Recession. According to some websites, some places, including the US Military still offer layaway services. However, it is very clear that due to the rise in online payment options, that its close cousin BNPL has taken over in popularity.
How BNPL is impacting the financially vulnerable
BNPL, when used for the right reasons, can be extremely helpful to buy much needed products and services, the ethics around the service itself has been brought into question by the UK government, debt charities and, not surprisingly, everyone within the fintech industry.
It has been reported that those who are financially vulnerable are more likely to use BNPL, and are more likely to use high-interest loans. Recently, the Bank of England (BoE) shared figures which found that three million UK households owe £2.7 billion on BNPL and that these users are most likely to be classified as financially vulnerable.
With so many retailers signing up to use BNPL as an option for payment, it has become very easy to buy and push payment to a later date. At its best, it can help people who need to replace appliances in an emergency, or allow people to manage their cash flow. At its worst, for consumers, it can become easy to mindlessly spend and service providers can simply play into people’s behaviour of seeking quick dopamine fixes for happiness, all the whilst allowing consumers to push the problem of paying to a later date, almost guilt-free.
Research by Bank of England economists has found that in the past year, 21% of people who use BNPL have fallen behind by two months or more with the repayments on at least one form of unsecured debt. This compares to 6% of other borrowers. It’s extremely worrying and shows that just because these services do not charge interest, doesn’t mean people cannot get into debt using BNPL options. Education is a critical part of it too. A recent survey by Creditspring revealed 47% of UK adults don’t realise you can get into debt with BNPL.
So what does the future hold for BNPL providers?
It’s hard to ignore the parallels between BNPL providers and technology giants – Meta, X, TikTok and any affiliated services have been condemned in the past for using behavioural manipulation to create unhealthy addictions to the platforms and using complicated, convoluted terms and conditions to mine for data.
The whole point of fintech is to democratise financial services to those who never had access to these services in the first place. BNPL has serviced a huge market as clearly there was a huge demand for it.
Although adults are free to make their own choices, the onus to behave ethically is on the provider. In 2022, Barclays, in collaboration with debt charity StepChange, published a report showcasing the lack of understanding around BNPL by both retailers pushing the product and by consumers. This included what these services actually are and are not obligated to do. Case in point, it came as a surprise to many people that only in 2022 did Klarna begin sharing information with credit agencies – and rightly so.
Furthermore, providers must clearly outline the risks in a clear, digestible way, and should be able to recognise when problems might occur before it happens without creating stress on the customer itself. All of these are likely to happen over the coming years as it becomes more and more obvious that BNPL, although an extremely innovative, useful service, can, like any financial product, cause financial distress to those who may already be considered financially vulnerable.
-----
On the chance that anyone reading this may be, or know someone who may need help with loans and debt, there are many organisations who are out there to provide non-judgemental help. A more comprehensive list of charities and support groups is outlined on the UK Government website.
For banks and financial institutions who are working on being compliant with the FCA’s Consumer Duty (created to help the financially vulnerable have access to products and services tailored to their specific needs), do get in touch with the Kalgera team.
About Kalgera
Kalgera, a London-based RegTech, is the first line of defence for financial institutions who want to actively support its most vulnerable customers. By helping the finance sector identify customer vulnerability through transactional data, Kalgera creates better outcomes for the customer and the financial institution itself.
We are committed to working with banks through several avenues to comply with the FCA's Consumer Duty Act. Kalgera’s state-of-the-art technology uses 11 parallel AI models to pinpoint vulnerability to financial abuse and low financial resilience with greater precision.
You can find our online training, in association with the London Institute of Banking and Finance (LIBF), here and more information over at our website.
About Kalgera
Kalgera, a London-based RegTech, is the first line of defence for financial institutions who want to actively support its most vulnerable customers. By helping the finance sector identify customer vulnerability through transactional data, Kalgera creates better outcomes for the customer and the financial institution itself.
We are committed to working with banks through several avenues to comply with the FCA's Consumer Duty Act. Kalgera’s state-of-the-art technology uses 11 parallel AI models to pinpoint vulnerability to financial abuse and low financial resilience with greater precision.
You can find our online training, in association with the London Institute of Banking and Finance (LIBF), here and more information over at our website.
