The role of the specialist market in restoring BNPL borrowers to financial health – Ward

BNPL credit agreements allow borrowers to spread the full cost of a purchase over time. For example, the largest player in the UK, Klarna, allows you to pay in 30 days (‘pay in 30’) or spread the payment across three monthly payments (‘pay in three’). A key benefit is that it’s free to use, with no interest or fees – unless of course, you’re late in paying. 

Until recently, the market seemed to exist in a bubble outside of the rest of the consumer credit industry. However, a few things have changed this year.

In June, the government announced plans to ensure that lenders carry out affordability checks, ensuring loans are affordable for consumers, and to also amend financial promotion rules to ensure BNPL advertisements are fair, clear, and not misleading. Lenders offering the product will need to be approved by the Financial Conduct Authority (FCA), and borrowers will also be able to take a complaint to the Financial Ombudsman Service (FOS).  

The impact on financial health 

The government’s review of the BNPL market was in part fuelled by concerns that such credit schemes encourage customers, and especially millennials and ‘Gen Z’, to overstretch themselves and live beyond their means. 

The other important change was Klarna starting to report data on customers’ usage of its products to credit reference agencies Experian and TransUnion. This was significant as until then, Klarna kept customers’ payment histories to itself, meaning other credit providers were unaware of how Klarna’s 16 million customers in the UK were conducting themselves with ‘pay in three’ and ‘pay in 30’ agreements (the Swedish BNPL giant was already reporting data on longer-term lending agreements of six to 36 months, which do incur interest). 

With a large number of credit arrangements now being reported to credit reference agencies for the first time, there will inevitably be good and bad outcomes. Customers who keep up with their payments will have the chance to improve their credit score through their good behaviour; on the flip side, the expectation is that some of these consumers will struggle; payments will be missed.  

In addition, the continuing cost-of-living crisis means more people are finding themselves under financial pressure and struggling to keep up with financial commitments. Add to this the rise in borrowing costs since the short but disastrous premiership of Liz Truss, and in all likelihood credit reference agencies will be reporting a rise in missed payments and defaults across the board.  

Credit blips from missed or late payments adversely affect a borrower’s score, so borrowers who have or are coming out of a fixed rate or off a preferential rate might find that they are being turned down by the high street who use automated systems and algorithms to make their lending decisions. 

Help is still available 

This is where the specialist market comes in.  

Many specialist lenders will review these cases and say yes when others have chosen to say no. At Central Trust, we look to serve the underserved. These victims of circumstance, who were previously good payers, but circumstances changed outside of their control which have led to them facing financial difficulty, will have their applications considered. 

Specialist players in the market tend to look at cases on their individual merit, taking into account what has happened, studying patterns of behaviour/borrowing before and since with positive outcomes where it all makes sense, allowing borrowers to repair and rebuild or merely achieve their goals until such time they are deemed a high street customer again. 

Specialist lenders can take a ‘common-sense’ view of a borrower’s financial situation and don’t allow a computer scoring policy to reject cases for no good reason.  

As a result, this part of the market can often offer the client a secured loan, which can help rebuild the credit profile, clearing the historical adverse, improving the credit score and enabling them to refinance back onto the high street when the time is right. 

BNPL schemes offer a convenient way of purchasing products without having to pay the total amount on day one, but they aren’t risk-free. It’s inevitable that the burgeoning market will lead to a rise in adverse credit, but thankfully the specialist market can play its part in helping borrowers get back on their feet.