In this article we look at the effect of an economic slowdown on payment choices, and ask whether BNPL will continue to be the poster-child of payments in this new environment.
Borrowing money via consumer credit or loans is going to get a lot harder in the next eighteen months.
What’s more, those who are already in debt are going to find it harder to repay their loans as the rising cost of living bites.
A J.D. Power study of US consumer debt predicts that default rates – those who can’t meet their repayments – will treble from just over one percent to four percent in the next six months alone.
“US consumer debt default rates could treble in the next six months.”
For some time, the Buy-Now-Pay-Later (BNPL) segment has positioned itself as a consumer champion against what it argues are punitive interest rates and unstructured repayment schedules from credit cards.
However, it appears a time of reckoning is upon the BNPL segment after half a decade of uninterrupted growth.
Just weeks ago, the UK government declared its intent to force BNPL players to carry out credit checks very similar to those imposed on credit providers – with similar moves planned by the US, EU, Australia and other markets that have seen rocketing BNPL use recently.
Mike Peplow, CEO of Paynetics, said: “Regulation is appropriate for BNPL, bringing the product into the mainstream whilst making sure we have positive outcomes for consumers.”
This may be so, but the fact is many consumers – particularly young consumers – see BNPL as free spending money, as new research from J.D. Power shows.
Their study demonstrates younger consumers are less aware of the risks of taking on debt and fail to understand how various payment methods – including BNPL – function.
BNPL users cite low payments, the ability to buy more expensive purchases, lack of interest charges and promotions and rewards as their primary motivators.
A whopping 38% of consumers ages 18-44 say they only partially understand the payment methods associated with these services and 5% say they do not understand them at all.
Impending regulation and challenges to consumer cash flow explain why BNPL giant Klarna has seen its market capitalisation plummet from around $40 billion in January to just $5 billion today as investors take fright at over-indebted consumers and new regulatory strictures.
Things could get uglier still as traditional credit providers draw in their horns, with J.D. Power’s research showing 40% of those who use personal loans are usually classified as financial vulnerable.
As credit conditions tighten, interest rates rise and goods and services become less affordable, lower-income consumers in particular are going to find it harder to make ends meet.
The studies we reference above consistently suggest that, overall, consumers are planning to switch to debit card payments and reduce their overall spending – prudent, perhaps, but not great news for the economy overall.
Expect BNPL to lose its shine over the next eighteen months – and look out for debit payments, already the most popular way to pay, to further rise in popularity in the years ahead.