Insights   /   Inflation’s Return Poses Risks, Offers Opportunities for BNPL
April 6, 2022

Inflation’s Return Poses Risks, Offers Opportunities for BNPL

Inflation is on the rise across the globe, leaving scarcely anyone or anything untouched.

Consumer prices in the United States rose at their fastest pace in 40 years in February, fuelled by supply shortages and mounting costs for housing and gas. The U.K.’s 5.5% inflation rate in January was the highest since March of 1992, with housing and utilities leading the surge.

Experts warn that still-higher prices lie ahead for both consumers and businesses, as economies around the world feel the impact of Russia’s invasion of Ukraine

For Buy Now, Pay Later (BNPL) systems, inflation’s resurgence offers both risks and opportunities.

On the one hand, consumers trying to ride out a spike in living costs are more likely to turn to low-fee, interest-free payment arrangements to make purchases.

But as BNPL’s popularity has grown, so too has the risk borrowers may not be able to pay off what they owe in time – or at all. This risk will only climb in an environment where prices for necessities such as energy and food are rising faster than paychecks.

Repayment Risks Rise Alongside Prices

According to a study released last month by the charity The Centre for Financial Capability, nearly one-quarter of adults in the U.K. had fallen behind on BNPL payments. Among younger shoppers – those aged 18 to 34 – that figure rose to 35%.

Separate research in the United States found among BNPL users, 34% had been tardy with one or more of their installments, with 25% of millennials missing one payment, and 30% of Gen Z users unable to make two.

Experts say those late payment numbers are bound to climb in inflationary times, as prices rise and consumer spending power drops.

A rise in BNPL defaults has already spurred regulatory scrutiny.

British financial services regulator the Financial Conduct Authority said last month that a number of BNPL providers had agreed to add clarity to their terms and conditions to assuage concerns over risks to consumers. Three firms even agreed to refund late fees under particular circumstances.

Additionally, the UK Treasury last year made a series of policy recommendations for the industry that included proposed oversight legislation and a potential role for the FCA. While the FCA does not yet have any power over the still-unregulated industry, it does have the right to review the fairness of consumer contracts.

In the United States, the Consumer Financial Protection Bureau has sought public input about consumers’ BNPL experiences and published a blog post advising consumers on the pluses and minuses of the payment systems. And last month, the House Financial Services Committee heard testimony from experts and consumer advocates on the risks and benefits of BNPL, which included calls for tighter regulation and more transparent data on default rates.

Protecting Consumers, Even from Themselves

But BNPL providers have an opportunity to step up and take action to help forestall defaults themselves, since non-payment serves neither the industry nor the consumer.

They can take measures to ensure customers are fully informed about their options and responsibilities before moving forward with a transaction. Sweden’s Klarna, for example, has KlarnaSense, a site to provide consumers with information on the management of personal finances.

Companies should also be up-front with users about the consequences of missed payments and defaults. Klarna charges a late fee of up to $7, depending on the past due amount and imposes restrictions on further use by the delinquent consumer. Klarna says fewer than 1% of its users fail to pay back what they owe.

At Affirm, there are no late fees, but tardy payments can affect the customer’s chances of getting another loan in the future.

Designing flexible repayment plans can help with late-paying customers as well, research by TrueAccord, a digital debt-collection agency, has found.

One suggested means of flexibility is to set up a customized repayment plan that dovetails with the times consumers are most likely to have cash on hand, such as around the days they receive paychecks or other regular income. That flexibility also helps BNPL businesses build goodwill and loyalty with often-fickle customers.

Afterpay has set up a “hardship policy” that offers customers guidance on how to contact the company to discuss their options – such as a new repayment plan – if they run into financial difficulties.

One final (and simple!) way to help late payers, experts say, is to use more than one means of contacting customers, such as a combination of text message and email. Using dual methods of communication has been shown to double repayment rates.

Today’s financial realities raise a key question: does inflation or defaults pose the bigger challenge to BNPL, or is it a confluence of the two? Furthermore, If rising prices prompt more consumers to turn to BNPL, which shields merchants from defaults, does that shift the default risk to lenders?

With retail prices soaring in the world’s economies, it is more important than ever that BNPL providers help merchants and customers make financially smart decisions.

After all, smart decisions are the key to a healthy and thriving industry.

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