By Yaacov Martin, CEO and Co-Founder of Jifiti
With soaring inflation and concerns about a recession, you’d think consumers would be more apprehensive about purchasing big-ticket items. Although that’s true to some extent, Buy Now Pay Later (BNPL) is helping shoppers digest the cost of both high-ticket and smaller purchases. What’s more, BNPL is becoming increasingly popular for everyday purchases. More and more consumers suffering economically are turning to this installment payment option for grocery shopping and fuel top-ups.
However, the concern is that BNPL’s use for consumables is leading to some consumers being exposed to unaffordable credit and other risks. For example, if a shopper misses a payment and one BNPL provider blocks them, they could quickly access other installment payments from another direct-to-consumer (D2C) provider. Due to a lack of credit reporting, sub-prime customers beginning to use BNPL for primary necessities can end up accumulating too much unmanageable debt.
So, while it’s helpful for consumers in the short run to have the option of BNPL products for consumables and groceries, it may not be in their best interest. Purchases that get used up quickly and must be replaced regularly may not be the right fit for this financing.
So, what can banks, lenders, and merchants do to help consumers make more responsible BNPL decisions during times of economic uncertainty?
Yaacov Martin
Let’s first define smart finance
Is a consumer buying their fifth pair of Air Jordan sneakers or a MacBook to be more efficient at work? Are they bringing more value to their lives and enhancing their growth with the things they buy? Do they even need the item in the first place? And if so, as is the case with groceries and gas, is it wise to use BNPL to finance the expense?
Smart finance means consumers are self-reflecting and asking themselves these types of questions before financing their purchases. Or it can involve financial institutions and fintechs helping consumers avoid rash decisions and set financial goals in order to get the most out of their money.
And although BNPL—a relatively new and currently non-regulated type of finance—broadens access to capital and therefore promotes financial inclusion, BNPL providers must comply with Environmental, Social, and Governance (ESG) standards to be placed in the smart finance bucket.
Consumer protection will improve once new regulation comes into play. But until then, banks, lenders, and merchants must take the initiative.
How lenders and banks providing BNPL can protect consumers
The beauty of BNPL lies in its accessibility, often meaning a user journey without any friction. However, ultra-frictionless journeys may also lead consumers into harm’s way. When a small amount of friction is purposefully embedded into the user journey to promote responsible lending, that is ultimately in the customers’ best interests. Barclays Partner Finance has coined this ‘positive friction’.
The idea is that lenders promote social responsibility and help consumers reflect on whether they can pay back or afford certain items, thereby reducing unhealthy debt accumulation.
By adding friction points, lenders can motivate consumers to borrow responsibly, question what they need financing for, and feel in control of their spending. For example, the time to repay a loan should always be within the lifespan of a product—and consumers should be aware of this when attempting to use BNPL for consumables.
Lenders and banks can also protect consumers by offering different types of BNPL products to cater to varying consumer profiles and needs. It’s all about matching consumers to the right financing and tailoring loan products to various transactions. Here are a few examples:
- Split payments: This Pay-in-3 or Pay-in-4 BNPL option is suitable for smaller cart sizes and medium-ticket purchases such as clothing. Consumers don’t pay interest, and the merchant pays a small transaction fee.
- Installment loans: This BNPL option is the more traditional installment or one-time loan, often repaid over six, 12, or 18 months. The consumer typically pays interest in the form of an Annual Percentage Rate (APR), which depends on the term of the loan.
- Line of credit: Extended ‘open to buy’ line for credit for a certain amount can be used for repeat purchases.
- B2B financing: Businesses have different risk profiles, order sizes, and financing needs than consumers. So, specialized B2B financing can include installment loans, lines of credit, deferred invoices, and working capital catered to business purchases.
This kind of flexibility from banks and lenders means that consumers’ financial transactions are optimized and customized for each purchase.
Merchants can offer BNPL responsibly too
In times of economic crisis, merchants can help their customers spread their expenses over time and manage their cash flow when credit card interest rates are rising. How? They need access to reliable and affordable BNPL products from banks where the terms are transparent and built on a centuries-old foundation of underwriting.
Many D2C BNPL providers offer a customer journey that’s almost too smooth, which has caused consumers to take out loans without being aware of the repercussions. However, banks and traditional lenders take a different approach: They make financing terms and any possible fees completely transparent. This is because they are no strangers to lending and operating within federal and state regulatory frameworks—they report to credit bureaus and lend within the realms of regulatory bodies.
Banks have unparalleled balance sheets, a focus on credit history, and years of financing experience. So, by offering BNPL products from banks, merchants won’t only sell merchandise but also build consumer trust in their brand by associating themselves with responsible lending practices.
In doing so, merchants can also help protect consumers from getting themselves into unmanageable debt
When large BNPL providers don’t report purchases and consumers don’t understand the T&Cs of financial offerings, consumers can easily lose track of their debt accumulation. Especially during an economic crisis, credit reporting through responsible BNPL products from banks is crucial to help consumers protect their financial health.
