The Looming BNPL Disaster Financial Threatening South Africa
The overwhelming majority of consumers now make purchases online. Indeed even long-time hold outs to the world of digital commerce were forced to concede during the ‘new normal’ lockdown adjustments of the last two years.
This means millions of people, some greener than others in the world of online credit, will inevitably opt for the hot new ticket in ecommerce: ‘Buy Now Pay Later’ (also known as BNPL) during the checkout process. Essentially, BNPL means the consumer can benefit from splitting their payments into smaller chunks over regular intervals or by deferring a transaction for a month or two.
The concept of BNPL is proving to be wildly successful in South Africa, with BNPL projected to grow by over 97% through 2022. The issue here isn’t about consumer convenience but about the lack of regulation and transparency that could mean that shoppers will get a higher bill than expected.
At first glance, BNPL makes sense, and means you can, in a nutshell:
- Spread an online purchase into equal instalments over three months.
- Make weekly payments towards the balance.
- Postpone a full transaction value to a specified date.
Providers such as Klarna, Clearpay and Laybuy are now a checkout option on just about every major retail or e-commerce site and offer immediate approval without so much as a credit check. Therein lies the difficulty and risk.
The Red Flag Raised by BNPL Lending
Most of us are familiar with the concept of a credit report and the application process for credit access via credit cards, overdrafts or mortgages. It can be stressful waiting for a credit check to come back, and in some instances very disappointing to get bad news, but it’s also a fundamental element of consumer protection.
Even if you’re a compulsive shopper with thousands in unsecured loans, you’ll receive a pop-up inviting you to choose BNPL over your trusty debit card – and many of the lenders won’t move a muscle to verify whether they’re lending responsibly. To play devil’s advocate for a moment here; we should acknowledge that some BNPL providers do offer credit checks as part of their process and ethos as a responsible business, the issue being raised here is the lack of regulation forcing these providers legally to complete their due diligence i.e. credit assessments and consumer background checks.
As fintech firms scramble to offer ever-more lucrative BNPL functionality and payment apps, big hitters in the industry are quick to point out that every single BNPL loan is unregulated. The situation is showing parallels to the initial launch of the payday loan industry and the ensuing consumer chaos.
‘BNPL’ parallels the risks of the unregulated Payday Loan
For those unfamiliar with the birth of the payday loan, these services launched first in the UK throughout 2006. Before this date the concept of payday loans didn’t exist publicly, and it quickly caught on in a huge way due to the speed, convenience and low-entry into credit options.
Over time, as the payday loan market became flooded with competitors, eligibility checks became an administrative nuisance that fell by the wayside that got in the way of approving more loans and making more money, in some cases the checks were never there to begin with.
People had easy access – often too easy – to fast borrowing, even if they didn’t have the financial stability to make the repayments. Just like the contemporary BNPL product, payday loans were so new to the market they didn’t fall under the remit of the National Credit Regulator in South Africa (NCR). Although these companies weren’t doing anything illegal, many consumers soon found themselves in trouble.
Eventually, regulators acted and various national reforms were introduced prompting lenders to instigate new consumer safety measures such as:
- Maximum repayment caps
- Upper limits on loan values
- Mandatory credit assessments
Reforms cull worst offenders and offer sustainable growth opportunities for the credit industry.
Naturally, these reforms had an immediate and devastating effect on many payday lenders. Within a few short months, many of the ‘household name’ providers had disappeared into administration as the new lending laws were too stringent for them to profit.
It is naïve, however, not to accept that there still remains a need for short term credit options for consumers and there lies the opportunity for businesses to operate within the new legislation, offer credit inside sustainable parameters and grow successful brands.
This is exactly what Wonga South Africa was able to do. It’s worth pointing out that this Wonga is a separate company despite sharing the ‘Wonga’ brand name with the UK version, which now no longer exists after folding into administration in 2018.
The South African lender is unrecognisable to its UK counterpart, with the core value proposition offered to customers changing fundamentally from high interest payday loans to instalment loans lasting up to three months. To avail of the instalment loan product, South Africans are required to pass stringent credit checks. Yet the company has flourished and become the dominant credit provider in South Africa.
So with such a powerful precedent showcasing the perils of unregulated credit… Why aren’t we applying the same regulations to the BNPL industry? The FCA has introduced initial rules about backdating interest payments, and has intentions to introduce more comprehensive BNPL lending regulations this year. For now, the craze is getting bigger and potentially more dangerous.
Zero Interest: The BNPL Regulation Loophole
It’s worth pausing here to clarify why a BNPL lender manages to escape obligations to lend rationally. You’d be forgiven for thinking it strange that your regular bank needs to run checks before bumping up your overdraft, but you can spend thousands online and be approved for BNPL in a few seconds.
The trick is that BNPL lenders don’t charge anything on the face of it. That’s not a typo – you’ll find BNPL options everywhere, with zero interest.
They slip through the regulatory net because the lender isn’t charging interest. They can trade freely, stomping over industry norms in every other lending product on the market.
However, no interest does not, in any way, tie in with no fees.
The absence of regulation means that:
- Consumers are sold BNPL services as a perk, without any time to consider their borrowing decisions or compare alternatives.
- The streamlined one-click process means many buyers aren’t aware they have signed up to a credit agreement with a third-party lender.
- Unethical advertising strategies include campaigns urging customers to ‘shop like a queen’ and ‘don’t wait until payday’ without clarity about the potential late payment fees for high-value purchases.
Essentially, many consumers don’t think of BNPL as credit at all, so they’re making knee jerk spending decisions without any oversight of the fee structure or potential to damage their financial security if they shop outside their means.
Currently, BNPL fees tend to be fairly small – the lenders make the bulk of their profits through commissions from the retailers themselves (a good thing).
But, consumers will start to accumulate direct costs if they don’t make every payment on time, and during the festive shopping frenzy, it’s highly likely that many people will find themselves in this boat.
How BNPL is Scaling Up Through Mainstream Financiers
One of the most troubling aspects of all this is that BNPL is expanding substantially. The payment method is being adopted by some of the names in the banking sector that customers trust.
- Monzo was one of the first UK banks to roll out BNPL to its five million customers, offering this option to pay for online or in-person transactions with credit limits up to £3,000 (albeit with an affordability check).
- Rival bank Revolut says it is developing a BNPL European service.
- Goldman Sachs spent £1.6 billion buying Green Sky, a BNPL lender primarily focused on home improvement loans.
- Barclays has indicated that it will extend its BNPL venture, which does add interest charges, offering credit options at Amazon checkout.
This expansion spells trouble since the lack of checks extends over to crosschecks between BNPL lenders. A customer with enormous debts might buy through multiple BNPL loans without any lender taking the time to verify whether they’re already in a sticky spot with another provider.
We’ll have to wait and see how the credit authorities react and what measures it feels will be sufficient to protect consumer interests while allowing the payment flexibility that resonates with today’s shoppers.
In the meantime, let’s heed the warnings from those who have been here before, and think carefully next time we go for the ‘easy’ payment option online.
