The impact of BNPL’s rapid growth on lenders

With almost half of UK adults having used BNPL, lenders face a key challenge: the varied data reporting practices among BNPL providers and CRAs. 

In this piece, we'll explore the rapidly growing BNPL market, and shed light on the disparities in data reporting and the implications for the credit industry. 

The rise of BNPL in the UK market 

BNPL has surged in popularity across the UK, transforming the way consumers spend. Recent stats reveal that almost half of the UK's adult population, 48%, have adopted BNPL to manage their purchases. A trend that’s reshaping consumer finance. 

In the past year alone, 7.4 million more people have used BNPL, a number that's expected to climb, especially during high-spending periods like Christmas and Black Friday. The average monthly expenditure through BNPL has also increased, jumping from £105 to £153 over two years. 

This sentiment was also recently echoed by the FCA who said; “Our research shows a significant increase in the use of BNPL over the past year,” 

While the FCA does not have regulatory oversight over BNPL products, it is determined to protect consumers using financial services where it can.

While 18 to 34-year-old’s are most likely to use BNPL for events like Black Friday and Cyber Monday, the 35 to 55-year-old group is increasingly relying on BNPL for Christmas expenses.

This demographic shift in BNPL usage reflects not only a change in consumer behaviour but also indicates a broader acceptance and reliance on alternative financing options. As BNPL becomes more ingrained, lenders need to adjust their strategies to accommodate this evolving landscape.

The inconsistency in BNPL data reporting to CRAs 

As we’ve briefly touched on, the rapidly expanding BNPL sector is facing a significant challenge: the inconsistent approach to reporting BNPL borrowing on bureau credit reports.  

Consumers are finding it increasingly easy to accumulate substantial debt through BNPL schemes, often without a clear understanding of the implications. 

Unlike traditional forms of credit, there's no uniform method for the bureaux to report 'pay later' borrowing. The result? A potential blind spot in consumer credit reports.  

Think about it; If a customer has engaged in multiple BNPL agreements or missed repayments, this information might not be reflected in their credit profile. But the absence of such crucial data hampers the ability of credit providers to make informed lending decisions. It raises the risk of consumers being extended credit beyond their repayment capacity. 

Research has shed light on another concerning aspect: many consumers don't realise they're incurring debt when using BNPL schemes. This lack of awareness can lead to missed repayments and an accumulation of debts, exposing them to financial risks they may not be prepared for. 

The situation underscores the need for more transparent and consistent reporting of BNPL activities. 

That’s one reason why Which? sought clarity from a leading CRA about the reporting of BNPL activities; “While specifics of agreements with BNPL firms weren't disclosed, the CRA confirmed that 'leading names in the BNPL sector' are in talks with them.” 

Bottom line: As BNPL continues to grow, the need for standardised reporting and data benchmarking becomes more pressing. For lenders, having full insight into data gaps could be key. 

The main BNPL challenges for credit providers 

Lenders, including banks and specialised financial institutions, rely heavily on comprehensive and accurate credit data to assess risk and make informed lending decisions. But gaps in BNPL data reporting can skew this risk assessment, leading to potentially unreliable credit decisions. 

Firstly, when BNPL transactions are not uniformly reported, lenders lack a complete view of a consumer's financial obligations. This incomplete picture can lead to an overestimation of the consumer's creditworthiness. In essence, a customer who may already be stretched thin with BNPL commitments could be judged as a low-risk borrower, simply because these commitments are invisible in their credit profile. 

Secondly, the lack of comprehensive BNPL data impacts the credit industry's ability to maintain complete and accurate customer data.  

To sum up, these challenges call for a proactive approach. Staying informed about the evolving BNPL landscape, advocating for standardised reporting, and leveraging data benchmarking to reveal potential blind spots are crucial steps. In doing so, lenders can protect themselves from unforeseen risks and continue to offer credit responsibly.

The need for better data benchmarking 

In the ever-evolving credit industry, the significance of robust data benchmarking cannot be overstated. This is particularly true in the context of BNPL, where the lack of uniform data reporting standards presents a unique challenge.  

Effective benchmarking is not just about comparing rates; it's about understanding the quality and comprehensiveness of credit data available to lenders. 

Without it, particularly in the fast-growing BNPL sector, credit providers might find themselves at a disadvantage. They risk making decisions based on partial information, leading to increased defaults, and ultimately, financial losses.

But data benchmarking allows credit providers to understand where they stand in the market regarding the quality of data they are using for credit risk assessment. This understanding is crucial in a sector where competitive edge and risk management are tightly linked.

Wrap-up 

As we wrap-up, the rise in consumers using BNPL marks a shift in consumer finance, presenting both opportunities and challenges for the credit industry. As we've explored, the inconsistent reporting of BNPL data poses risks for both lenders and consumers. 

In summary, better data benchmarking in the BNPL sector is essential for maintaining a healthy credit market. It's a necessity for lenders to adapt, stay competitive, and manage risks effectively in a rapidly changing financial landscape.