Why the game is up on irresponsible credit

As we face a new year, there’s little doubt 2023 will see a continuation of the challenging economics that have come to characterise the early 20s.

Disposable income has drastically reduced - one in five UK households has an average weekly shortfall of £60 between earnings and money needed to cover essentials including rent. As such, many are turning to buy now pay later (BNPL) to try and bridge the gap in earnings and spending, driven by a need for financial flexibility that traditional finance often lacks.   

BNPL can be unsustainable for consumers 

It is completely understandable why many have turned to BNPL as disposable incomes drop, but this form of BNPL is simply not sustainable for consumers. 

Much has been written about how young people’s use of BNPL can lead to high levels of bad debt and poor credit ratings. While we know regulation is on the way, the immediate problem facing most consumers is that many BNPL providers are still failing to run the appropriate credit checks before enabling people to buy items using their service. 

These gaps in checks have morphed this latest offering into irresponsible credit. Creating an environment where some cannot afford to pay instalments back and instead rack up heavy interest repayments, pushing them into debt and creating unsustainable losses. 

Nevertheless, for the consumers who have undergone the appropriate checks and can afford it, paying in instalments is a great way to spread the cost of a purchase, especially in the current economic climate. 

However, this ideal is unfortunately too few and far between. Consumers are still calling for much more clarity and security that is as of yet, going unanswered. And this is why the game has to be well and truly up for this kind of credit.

Merchants are paying for their own disservice 

Overall, we are seeing both consumers and merchants struggling with their income. And merchants who partner with BNPL providers ultimately help very few. Customers are unknowingly opening themselves up to risky debt and at the same time, merchants are paying BNPL providers for their own disservice. 

Those who have added BNPL to their checkout options have very little choice but to pay the ridiculous fees to providers, at an average of 2-8 per cent. And in return, they have to put their own brand on the backbench during the payments journey and after purchase they risk losing control of their customers’ journey altogether. 

Brands who have opened their arms to BNPLs will eventually help put their customers directly in the jaws of irresponsible credit and will ultimately help finance BNPL’s attempts to create the structures that could help extinguish their value.   

As far off as it seems, there is a real possibility that merchants could be pushed entirely to the sidelines and see their role severely diminish. Leaving consumers almost completely exposed to the risk of irresponsible credit accompanied by a substantial lack of information. However, brands can go further to stand in solidarity with their customers, by showing them - and the BNPL providers - that the game is up on irresponsible credit.   

There has and always will be an underlying need for credit and BNPL is simply the latest manifestation of this need. 

Responsible credit in 2023 will take the form of next-generation instalment programme providers that will value and provide control and transparency. 

Consumers will be able to spend responsibly, knowing they can pay in flexible instalments. While merchants can pay to work with providers, not against them, and own the instalments experience themselves.  

This business model iteration will learn from the first incarnation of BNPL’s mistakes and can become a beacon of trust and reliability, during a time when uncertainty and anxiety reign. This is why it is time for the game to be up on irresponsible credit. 

The views and opinions expressed are not necessarily those of AltFi.