The Industry and Parliament Trust hosted a Breakfast Event between parliamentarians, skills providers and industry entitled, ‘What next for digital payments’ on Tuesday 11 January. The discussion was chaired by Kevin Hollinrake MP, a member of the Treasury Select Committee, with guest speakers Alex Marsh, Head of Klarna UK and Professor Ania Zalewska, Director of the Centre for Governance, Regulation and Industrial Strategy, School of Management, University of Bath.
Growth of non-cash payments
The use of digital payments has been growing considerably for many years, but the COVID-19 pandemic has dramatically accelerated this process, notably in online shopping and the use of non-cash payments. Indeed, Merchant Machine predict that cash will make up only 0.5% of transactions by 2026, from 27% in 2019. To attract customers and to improve their online experience, businesses have also started to accept more flexible ways of payment. In particular, ‘buy now, pay later’ (BNPL) has rapidly gained in popularity, a trend that is expected to continue. Finder.com estimate that BNPL purchases (£9.6 billion of in 2020) will triple by 2024.
The growth of BNPL
BNPL allows consumers to delay payment for a time at zero interest with the BNPL companies making their profit from a merchant fee and customer late payment fees. The convenience of spreading the cost of purchases for those experiencing temporary cash shortages or simply wishing to take advantage of interest free credit ability to spread the payments over a period has proved enormously popular, and the BNPL companies claim that their service allows retailers to increase average sales by 27%. BNPL is particularly popular with those who cannot access conventional credit, a growing group during the pandemic. The lowest quintile of earners experienced an average decline of 13% in income during the pandemic (Woolard Report) and over 25% of people have entered overdraft solely because of the pandemic (KIS Finance). BNPL may seem like an attractive alternative for these purchasers. Finder.com reports that 9.5 million Brits say that they avoided buying from retailers who do not provide BNPL options.
Consequences of cheap credit
Providing cheap credit to those who have low probability of repayment and poor financial planning skills is likely to increase indebtedness rather than reduce it. Little understanding of financial concepts and rules is likely to result in bad decision making and exceeding prudential levels of borrowing.
According to the Woolard Report, 10% of bank customers who made a payment to two of the large BNPL providers in November 2020, exceeded their bank overdraft allowance in the same month. Credit Karma’s research shows that 42% of £3.3 billion spent over the last Christmas is still to be repaid with 11% of customers already missing payments.
The high level of repayment defaults has consequences for businesses too. Many customers being unable to fulfil the payment obligations return goods purchased, which frequently cannot be resold. According to the KPMG’s Annual Retail Survey 2020, British retailers lose £7bn per annum as a result of returns.
Improving financial literacy
The inability to recognise overspending and to foresee its consequences is rooted in poor financial literacy, incomplete information about financial products and their poor regulation. To help people make good decisions and better utilise the potential benefits of financial innovation, it is vital that the financial literacy of the general population is substantially improved. Financial literacy surveys show that 48% of Brits fail a basic personal finance test (Freetrade’s surveys) and 68% do not understand what Annual Percentage Rate is (KIS Finance). It is vital to educate people on the consequences of borrowing money, what the potential consequences of defaulting are and how to perform basic financial planning.
The lack of regulation of BNPL contrasts sharply with that of banks. To make BNPL work for all consumers it is crucial that BNPL platforms provide clear and complete information on both the structure of payments and the consequences of defaulting on these payments. Individuals must be fully aware how much it will cost them to default on payments and how it may affect their credit ratings. The format of advertising, restricting BNPL being default payment options, the information provided about the payment structures and about the costs and other consequences of default could be standardised across providers. Proper credit checks of consumers could be made compulsory before a BNPL option is offered.
Words by Professor Ania Zalewska, Director of the Centre for Governance, Regulation and Industrial Strategy, School of Management, University of Bath