Payments are arguably the face of fintech. When you think about financial technology, it is easy to think about solutions which are making payments faster, easier and more accessible.
Now, The Fintech Times turns its attention to the perception of BNPL and, more specifically, the various myths surrounding the space and how providers are busting them.
Not all BNPL providers are the same
As Tom Eyre, co-CEO and co-founder of credit broker Loqbox, explains, although BNPL has a bad rep, it’s no different to other areas of finance with providers falling on both sides of the ‘ethical spectrum’: “There are no ethical or unethical lending products – there are simply lending products and how consumers use them.
“You’ll find plenty of BNPL providers who are upfront and transparent about their T&Cs, and who go to great lengths to explain things clearly to people signing up for their services.
“There are also lenders that count on their customers not understanding the T&Cs and whose revenues depend on late repayment and penalty fees. Ultimately, it comes down to the practices of the individual lender and the behaviours of the consumers using the products.
“Irrespective of whether it’s a credit card, a personal loan from a bank, or a BNPL service, there will always be people who can’t manage their money or run into financial difficulties – or those who have no intention of repaying money borrowed. Lenders take a risk every time they extend credit to people, and that risk has to be priced.
“How do we reduce that risk? By educating people about financial health as early as possible. Schools don’t teach people how to understand overdrafts or APRs, or about the financial services they’ll be using once they leave school. There needs to be a greater conversation around money, financial health and consumerism, and it needs to start as soon as possible. The best shield against poor consumer outcomes is a well-educated and empowered consumer base.”
Debt trap views aren’t quite fair
Kris Costello, global head of sales lending division at debt management software provider Aryza, explains: “BNPL offerings have garnered consumer interest by addressing the need for financing consumer payments in a manner more seamless and transparent than traditional payment methods, providing advantages such as low upfront costs, simplicity, and smooth transactions.
“A prevailing assumption is that BNPL is predominantly utilised by young individuals with limited incomes and transient lifestyles and is seen as a readily available source of low-cost credit for frequent, low-value purchases, positioning it as a potentially risky form of lending. However, this assumption isn’t accurate.
“One myth which has been busted in the past few years is that users of BNPL pose a high credit risk. Contrary to expectations, delinquency levels among BNPL users are presently low. Notably, some BNPL customers exhibit better payment performance than counterparts with similar credit scores, suggesting a lower likelihood of falling into arrears.
“This positive trend may be attributed to the use of recurring payments or debit cards as payment methods, limiting the potential for default and enhancing overall credit performance. Additionally, some BNPL borrowers surpass their credit scores due to their newness to credit rather than a history of defaults.
“At present, there is no evidence to suggest that individuals are leveraging BNPL to burden themselves with excessive credit. The likelihood of defaulting on borrowing is not higher post-BNPL usage compared to the pre-BNPL period. Vigilant monitoring of this behaviour will be crucial over the next year, particularly amid rising inflation, tightened consumer incomes, and the industry’s evaluation of the significance of BNPL behaviour in shaping credit risk assessments.”
Informing consumers properly
James Booth is VP partner management EMEA at PPRO, the digital payment methods platform. Booth explains: “In some ways, BNPL has made significant strides in dispelling myths and addressing concerns around potential debt traps although there is still a way to go. Transparency, education, and responsible lending practices are key to busting these myths.
“This past year has seen BNPL providers increase their efforts to ensure that consumers are well-informed about the terms of their purchases. Many providers have started to include clearer explanations of their services and have implemented affordability checks to ensure consumers can manage their repayments without financial strain.
“The industry has also started to see a shift towards providing more consumer-friendly features, such as repayment reminders, which have been well-received and helped reduce the incidence of missed payments. These nudges encourage responsible financial behaviour and help consumers keep track of their obligations.”
Communication is the key
Improved communication and responsible lending practises are helping to dispel the negative myths surrounding BNPL, says Serena Smith, chief client officer at i2c Inc:
“Firstly, there’s been an enhanced effort to clarify terms and conditions associated with BNPL offerings. Clear, straightforward communication about repayment schedules, interest rates, and fees has helped demystify BNPL arrangements for consumers. This transparency is crucial in busting myths and building trust.
“Furthermore, responsible lending practices have been at the forefront of changing perceptions. Many BNPL providers now perform credit checks and affordability assessments to ensure that consumers don’t overextend their financial commitments. The introduction of transparent fee structures has been instrumental, in clearly outlining any costs associated with late payments or extended credit.
“The broader financial education around BNPL, aided by consumer advocacy groups and financial advisors, has played an important part. By educating consumers about the prudent use of BNPL, these entities have helped create a more informed user base that understands the benefits and risks associated with this payment method.”
‘BNPL isn’t the big bad wolf some thought it was’
Ultimately, BNPL provider have improved their practices, and this is being reflected in the growing numbers of people using their services.
Sergi Fitsak, managing director of consulting and software development company Softjourn, explains: “BNPL providers have actively addressed concerns about the debt trap. They’ve improved transparency in terms and conditions, enhanced user education, and implemented responsible lending practices. This concerted effort has debunked many myths, making consumers more confident in using BNPL services.”
The thoughts of Shawn Carpenter, chairman and CEO of stock market alerting app Stock Alarm, also appear to mirror this: “About those scary stories saying BNPL is a debt monster in disguise, the past year has busted those myths. With a bit of know-how and responsible spending, BNPL isn’t the big bad wolf some thought it was. Companies are getting better at explaining the deal, and there’s more of a safety net now with all the new rules.”