DE-RISKING BNPL AHEAD OF KEY SEASONAL EVENTS
Jaywing's risk and analytics experts, Katie Stones, Will Watson and Alex Denby, reveal insights into consumer trends and BNPL regulations to discuss whether retailers should be conducting affordability checks ahead of Black Friday, Christmas and beyond.
1. THE LOW DOWN.
BNPL WAS LAST YEAR'S FAVOURITE ACRONYM.
Providers enjoyed the competitive power of this largely unregulated lending solution.
Retailers rapidly signed up to their offering.
Many consumers abandoned credit cards and other traditional methods of payment, including instant payment through debit cards.
But the industry has changed.
Despite the easy payment solution remaining popular amongst consumers and retailers, its future is uncertain.
Its rapid uptake across sectors has sparked scrutiny and headlines about consumer debt management and soon, BNPL lenders will have to be approved by the Financial Conduct Authority (FCA) and conduct affordability checks on all potential customers.
BUT CUSTOMER APPETITE FOR THIS FLEXIBLE PAYMENT SOLUTION ISN'T SLOWING DOWN.
In fact, it’s proven beneficial to many consumers during the cost-of-living crisis.
of existing BNPL customers have increased the amount they are spending using BNPL (Credit Karma, 22)
of consumers state that BNPL is becoming more appealing in the cost-of-living crisis (Barclays, 2022).
Whilst these stats look promising for BNPL providers and retailers alike, one must consider that heightened BNPL use could be a result of inflation and the cost-of-living crisis, where consumers feel they must turn to this borrowing solution to keep up with their regular purchases.
According to the Director of External Affairs at StepChange, “There is rising evidence that buy now, pay later isn't just being used to buy discretionary items, like fashion, but also life's essentials, like groceries” (2022, Bloomberg UK).
For retailers using, or looking to use, BNPL providers, combining risk management strategies with knowledge of consumer trends and BNPL regulations is going to be key for responsible growth and positive brand reputation across this year’s seasonal events.
2. THE FACTS. THE FIGURES. THE FESTIVITIES.
Black Friday/Cyber Monday is the third most popular shopping holiday – right behind Christmas & Mother’s/Father's Day - with 25% of consumers shopping for items during these sales.*
growth in BNPL use on Black Friday 2021, compared to 2020 (The Power 50, 2022).
Consumers most likely to have made a purchase using a BNPL plan are 25–34-year-olds (20%), followed closely by consumers aged 34-44 (18%).* This is also the age group that is driven by sales events like Black Friday, with 3 in 10 global consumers aged 25 to 34 hunting for these bargains.*
On top of these consumer trends, retailers must remember that, around this same time, consumers will also be affected by inflating household bills (including energy prices, which are set to increase by 26.8% as of October 1st, according to the BBC, 2022).
As the cost-of-living crisis brings less opportunity for shopping sprees, customers will be looking to these key discount events for their purchases.
The same can be expected during Christmas which is, globally, the most popular shopping holiday, with 57% of consumers shopping for this event. *
of consumers are now considering purchasing their Christmas presents using BNPL offers (OpenMoney, 2021).
While these stats appear promising for brands looking to increase BNPL sales in the coming months, this expected uptake is likely to drive further missed repayments which, according to Credit Karma, have already increased by a staggering 30% since 2021.
To prepare for these key seasonal events and potential spikes in BNPL usage, retailers must increase their knowledge of BNPL regulations to ensure a growth in sales does not put their customers, or themselves, at risk.
3. THE REGULATIONS.
A 2022 study done by Barclays found that 54% of retailers mistakenly believe that most BNPL companies perform full credit checks on consumers, and 39% thought that these providers, by law, needed to follow the same rules as traditional banks and finance houses.
NONE OF THIS IS TRUE. YET.
This is because of the exemption to the Consumer Credit Act (CCA), designed to allow the delayed payment of goods and services, as long as that delay is time-limited and does not involve the charging of interest.
While the FCA has expressed concerns over a lack of clarity in BNPL terms and conditions, customers borrowing more than they can afford, and credit ratings suffering after late payments, BNPL products remain largely unregulated in their present guise.
In 2020, the FCA commissioned a review of the UK unsecured credit market, including BNPL. The report, the Woolard Review, was published in February 2021 and contains 26 recommendations, all of which were designed to:
- Improve consumer understanding of BNPL schemes
- Determine how credit information should be used and shared
- Implement new regulations to protect UK consumers, designed using an outcome-based approach.
Following this, the UK government published a consultation paper in late 2021 to gather views from consumer groups, BNPL lenders and other businesses such as retailers who offer BNPL to inform decisions about the shape and format that any regulation should take. The consultation’s findings were announced in June 2022, where the Government confirmed that BNPL rules will be tightened in order to protect its users. The announcement declares that BNPL lenders will have to carry out affordability checks on all potential customers and will have to report credit information to the credit bureaux. BNPL advertisements will also have to be fair, clear and not misleading, and lenders will have to be approved by the FCA.
These regulations represent a much-needed, optimistic future for BNPL users, where transparency is emphasised, and the end customer’s needs and safety are prioritised.
BUT THESE REGULATIONS ARE STILL MERELY IN PLANNING STAGES AND ARE UNLIKELY TO BE PUT IN PLACE UNTIL MID-2023.
WHAT THE REGULATIONS MEAN FOR RETAILERS
While these regulations do not directly impact retailers simply using a BNPL provider, they cannot be ignored. Indeed, one of the top attractions of using a BNPL provider is that they take the risks. Is your customer late on an instalment? No problem - the provider will take care of it. But there is a problem. A hidden one.
Negative experiences brought about through BNPL providers can directly affect the reputation of the retailer whose products/services were purchased using this payment solution.
If your customer has incurred a late-payment fee, has had their credit score impacted, or has racked up debt, this could cause negative associations with your company, and even result in the customer resenting your brand.
AND, WHILST THE FINANCIAL IMPACT OF A NEGATIVE BRAND REPUTATION CAN’T BE QUALIFIED – CUSTOMER LOYALTY AND TRUST CAN.
According to QuickSprout, it costs approximately 6 to 7 times more money to acquire a new customer than it will to retain an existing one, and you can increase your profits anywhere from 25-95% just by increasing your retention rates by 5%.
On top of that, a study by Edelman found that 81% of consumers feel they need to be able to trust a brand before they buy from them.
IN OTHER WORDS, TRUST AND LOYALTY ARE EVERYTHING. THEY ARE YOUR KEY TO BOTH SHORT-TERM SUCCESS, AND LONG-TERM GROWTH.
When using a BNPL provider, it is essential to keep your customer at the forefront of your strategy. Taking precautions with your provider is necessary to achieving this. They need to be more that your payment solutions supplier, they must be your partner. Understanding what current precautions they are taking, particularly in terms of affordability assessments, will be key to keeping both your customers and your brand reputation safe. You should conduct an audit of your BNPL provider to ensure their solution is sustainable for your business, and aligns with your brand’s principles and ambitions.
That being said, whilst BNPL remains largely unregulated, consumer demand continues to grow, and missed repayments are set to rise amid the cost-of-living crisis, we recommend adding another layer of safety to your BNPL strategy.
To treat your customers fairly and ensure a positive brand reputation whilst regulations remain minimal, we strongly recommend implementing your own affordability checks.
This will be increasingly important ahead of key seasonal events, like Black Friday and Christmas, where the effects of the cost-of-living crisis will hit millions of UK households and the use of BNPL is set to spike.
4. THE AFFORDABILITY CHECKS.
Affordability assessments are designed to ensure customers can afford to repay the loan in full and by the agreed payment structure, and to ensure that lenders (including retailers offering BNPL) are not accepting customers who clearly cannot meet the repayment criteria or can only do so by putting themselves in financial difficulty.
The purpose of these checks is to protect your customers and, for retailers using BNPL, to build trust around your brand.
Affordability checks can be used by retailers to understand the level of financial commitments a customer may already have, the level of disposable income they have available, and whether any additional borrowing would put them under any financial stress. The intensity at which an affordability check is conducted typically depend on the loan value or purchase price, with higher value products/services being subject to a higher level of scrutiny. For example, whilst banks and building societies may need to scrutinise personal documents such as payslips, bank statements and individual credit reference checks before making a mortgage offer, retailers offering BNPL solutions, credit or store cards are lending much lower amounts of money, and, therefore, will require less complex affordability checks.
Retailers can conduct affordability assessments with the aid of Office of National Statics (ONS) data. This publicly available information provides detailed figures on essential living expenditure and more discretionary spending habits, based on factors such as income, employment type and household composition.
Credit bureaux can also provide affordability assessment information, largely based on current account turnover (CATO) data. These are often supplemented by modelled income and expenditure estimates which can be used to verify captured income, or to directly estimate disposable income.
Alternatively, an open-banking approach could also be used. Whilst this could add slightly more friction to the customer journey, it means you would not have to capture additional information such as household composition or employment type (that would be required if using ONS data for assessing affordability). Providing there is sufficient transaction information in the customer’s bank account, and an adequate level of categorisation by your open banking provider, you will be able to see up-to-date information on income and expenditure and undertake full affordability assessments. Another key benefit of this method is that open banking is an effective anti-fraud tool, which can help support immediate spend.
Whatever the approach taken to the affordability assessment, it is common practice to build in some form of buffer, that is commensurate to the product and the brand’s risk appetite, to ensure they can evidence they are acting in a responsible manner that effectively protects both the customer and them. Luckily for retail brands, most BNPL plans have short timeframes for repayment, and economic circumstances are much less likely to change within in a 3-month period, so the approaches to building in some degree of conservatism are often justifiably simplistic.
5. THE KEY TAKE AWAYS.
Many retailers do not see BNPL as a financial risk. However, a bad experience with your BNPL provider is likely to affect your brand, and one cannot overlook the impact of reputational damage on both brand value and revenue.
Customer loyalty and trust are the core of brand reputation. And, let’s face it, BNPL providers don’t enjoy the highest levels of trust right now. In fact, research by YouGov found that only 36% of global consumers trust BNPL companies.
With shopping sprees and holiday spikes in BNPL just around the corner, retailers must review the current practices of their payment provider in line with regulatory and risk management insights, focusing primarily on their use of affordability assessments. As customers look to BNPL for seasonal shopping, as they begin feeling the full effect of the cost-of-living crisis, and as a set date for the implementation of BNPL regulations remains unknown, this review should also consider whether your company should implement its own affordability assessments.
To summarise, affordability assessments are a small price to pay to protect yourself and your customers, fuel brand loyalty and trust, and increase retention. And there are quick and easy ways to implement some simple affordability checks.
Still not convinced?
Here’s a breakdown of why you should implement your own affordability assessments and effectively communicate these with your customers:
- Your customers will feel valued and are more likely to be loyal to your brand. Many companies claim they are customer-centric - you’ll be proving it by your actions.
- You will encourage increased basket sizes and repeat purchases. You’re not only providing them with a flexible payment solution, but you’re also instilling confidence and trust in customers by showing that you have their financial interests at heart.
- If open banking is used, affordability assessments could be undertaken continuously, with the customer’s consent, providing insight into ongoing credit limit management.
- You will gain a competitive edge. As we mentioned before, many retailers don’t fully understand the implications of using a BNPL provider and how their regulations differ from that of a traditional lender. By conducting your own affordability checks, you will be viewed as an innovative brand at the forefront of BNPL and responsible lending.