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BNPL regulation: Is consumer debt finally reaching breaking point?

BNPL has, to date, managed to escape regulations aimed at other interest-bearing loans. In the UK, where the BNPL market was worth £5.7 billion in 2021, as with regulators in the US, Australia and the EU, the watchdog has announced plans for tougher measures.

Is consumer debt finally reaching breaking point?

Alongside this, data from the Bank of England showed that the annual rate of credit card borrowing was 13% higher in July than a year before, as UK consumers increased their credit card borrowing at the fastest annual rate in 17 years last month, in a sign of the intensifying cost of living crisis.

The jump, the biggest since October 2005, comes as wages fail to keep pace with inflation, which has already hit 10%, with some investment banks suggesting it could roughly double by the turn of the year.


Short-term interest-free loans can be an attractive option for shoppers and retailers. Merchants will subsidise credit if it leads to more sales. But the expansion of BNPL, even available for takeaway meals, has encouraged people to amass unaffordable debts.

Last year Fitch reported that delinquency rates at some large US BNPL providers had more than doubled, while credit card late payments were relatively flat (for now).

The UK government has now published draft proposals aimed at improving consumer protection. They arrived more than two years after an official review called for urgent regulation of a practice that carried significant potential harm.

For the consumer it is almost certainly too little too late, but for the providers the strain is also showing.

Klarna’s valuation dropped from $46 billion to $7 billion in July. Shares of US-listed Affirm, which recently announced job cuts and a big quarterly loss, are down 71% over the past year. And now Australia’s Openpay, which floated in 2019, went into receivership after running up heavy losses.

Credit card life support

On the credit card side, the figures are a sign that households are struggling with the soaring cost of living, even before households are hit with an 80% increase in energy bills. This will take effect from October 1, and could leave many people with the choice of cutting spending or borrowing more.

The data also showed individuals took on a net additional £1.4 billion in consumer credit in July, down from £1.8 billion in June, but above the 12-month pre-pandemic average to February 2020 of £1 billion.

The additional borrowing was split equally between credit cards and other borrowings, such as car financing. The BoE data suggests that consumers are already battening down the hatches against what will almost certainly be an exceptionally tough winter.

A rise in borrowing is usually associated with discretionary spending by consumers on non-essential goods and services.

But with inflation running at the quickest pace in 40 years, real wages falling and consumer confidence at the lowest level since records began in the 1970s, several economists said that it was a sign of households borrowing more to maintain living standards.

Separate figures released by the debt charity StepChange showed the proportion of new clients citing the cost of living crisis as their reason for debt rose 2 percentage points between June and July to 20%.

The proportion of those seeking debt advice because they were behind on their gas bills and electricity bills also increased to 26% and 30% respectively. More than two-thirds had credit card debts.


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