Retail finance has fallen under intense scrutiny, with tighter regulation of the industry looming and individuals facing increased living costs. Platforms which provide retail finance must build trust in buy-now pay-later services to continue growth.
Despite 83 per cent of consumers stating they have ‘high trust’ in retail finance, 100 per cent of those interviewed were anxious about providing personal information. Customers need reassurance and need to trust organisations. This is achieved through transparency. The best way to implement this? Todd Latham, CEO of Divido, the fintech allowing you to apply for finance online, via email or mobile phone, believes it to be through ethical buy now pay later (BNPL).
With over 15 years of experience in fintech, having previously worked at Currencycloud and American Express, Latham told The Fintech Times why ethical BNPL lending is essential amidst the cost-of-living crisis:
The BNPL market has grown exponentially. It currently represents over £132billion in consumer spending and is expected to reach £368billion by 2030. That growth is unprecedented, and it has come largely without any form of government control.
That is changing, and rightly so. Consumer protection is progressing in the form of new regulation, and this will provide more stability for lenders and retailers. But until that day comes, lenders and merchants must take the initiative. They must start to balance capitalising on the market opportunity with providing credit in an ethical manner.
The benefits of being an ethical business
Firstly, it is important to understand why it matters for a business to act and be seen as conscientious and ethical.
There are multiple studies into young people’s shopping behaviour that give the sense consumers nowadays are demanding the brands they buy from, and the products they purchase, be sustainable and ethical. One Nielsen report, for instance, found 73 per cent of millennials would pay more for sustainable goods.
This increasingly popular spending behaviour can just as easily apply to finance products, too. That means lenders and merchants invested in BNPL are not exempt from the ever-growing moral standards of their customers. Both parties must adapt faster than the pace of regulation if they want to stay afloat in this fast-moving market.
What does this look like in practice? First and foremost, it means not lending to consumers who won’t be able to repay their loans. Lenders and merchants can’t be seen to be contributing to peoples’ economic hardships. If they do, they will develop a negative reputation among the very group of people they wish to appeal to.
‘Reputation is king’ is a statement that has long held true. In the age of social media and online shopping, it has never been more pertinent.
What is ethical lending?
The original BNPL model was designed to help consumers with stable incomes to purchase high-cost items without needing to save up. Thus, it was offered almost exclusively for high-value items such as furniture, motor vehicles, tools and equipment.
Modern-day BNPL providers, however, are in a race to the bottom. They have lowered their minimum transaction limits so far that now even low-ticket items can be purchased ‘on the tick.’
This has been seen to empower retailers in high-turnover categories – particularly those in the realm of fast fashion. But, at the same time, it has also led to many consumers taking out real loans. Often unbeknownst to them, these are marked on their credit reports, and fund the cost of seemingly trivial purchases.
Many of those customers have fallen into arrears; many more have had to borrow from elsewhere to repay their loans. Credit files have been damaged in the process.
Striking a balance
Where, then, do we draw the line? We know that there are some products or services that, ethically, should not be available to purchase through BNPL – but what are they?
This is for the individual lender to decide, but at the very least, we recommend the repayment window of the loan should never outlast the lifespan of the product. That should answer the question of whether it’s right to lend against everyday essentials like fuel and groceries.
We could then ask questions about sectors like high street fashion retail. With fashion windows changing faster than ever, and people going clothes shopping every one to three months on average, there is a chance fashion-conscious shoppers could end up stacking multiple loans if they get into the habit of shopping with BNPL.
Ultimately, lenders must strike a balance between what is good for their merchant customers (greater profits, larger baskets, more repeat customers) and their end-users, the consumers (financial security). Both merchants’ and consumers’ sentiments and referrals are critical to a lender’s future success – more so if they offer products beyond retail finance – so acting with respect to both is vital.
Thus, lenders should continue to facilitate BNPL on behalf of retailers, but only where doing so is morally defensible.
Building trust through BNPL
As for merchants, the major problem they face when working with BNPL platform providers is that, together, they have started to offer too smooth a journey. This has often caused consumers to take out loans without being made aware of the potential repercussions.
From the merchant’s perspective, once they have been paid by the lender and delivered the goods to the consumer, their side of the bargain is done. But it doesn’t feel that way to the consumer. Should they fall into financial hardship, it may not be the lender they blame, but the merchant. This carries the risk of damaging the merchant’s brand.
Merchants should take extra care to ensure consumers are given the information they need to make an informed decision. They should be made especially aware that BNPL is a formal loan agreement that can affect their credit scores.
Communication is one of the avenues government regulation is set to crack down on in 2023. But retailers can make a head-start today. We suggest merchants should build out content that helps to explain the mechanics of BNPL for the benefit of their customers. That means also being forthcoming about the role both the merchant and the lender play in the transaction, who is responsible for what, and how each side benefits from BNPL.
This is not just good business practice, it’s a moral imperative.
Getting ahead of the competition
The BNPL market is at a critical juncture. It’s high time for retailers and merchants to start updating their policies and procedures to reflect their ethical responsibilities.
No consumer should be encouraged to spend more than they can afford, and those brands that do encourage this behaviour will soon be left by the wayside as regulation comes in and consumers steer clear of these unethical organisations.
Remember, the BNPL market may represent a huge opportunity now, but it is projected to grow even greater. Getting on the right trajectory and providing consumers with positive friction ensures your business scales along with the industry.
With that said, we urge everyone involved – lenders, merchants and platform providers – to align themselves with the new moral standard of Buy Now, Pay Later.