UK BNPL market continues to grow as Banks join the party

Despite warnings to the contrary and the growing economic storm, UK banks are still rushing into BNPL despite rising risks of default and increasing regulatory scrutiny.

The move is seen as a defensive effort to win back young users more comfortable with FinTechs like Klarna than credit cards.

With BNPL rivals snapping up younger customers, NatWest, Virgin Money, HSBC and Monzo have all launched BNPL products in the UK over the past year.

FinTechs such as Klarna have benefited greatly from the boom in online shopping and BNPL demand sparked by the pandemic.

Researchers at the universities of Chicago, Warwick and Nottingham estimated that the UK BNPL market grew to £5.7 billion in 2021, more than double the figure calculated by the Financial Conduct Authority for 2020.

“Take up has been way ahead of what we were expecting,” said Monzo chief executive TS Anil of Flex, the service it launched in September, which he said was “the right long-term play” for the neobank.

Several bankers said that they did not expect their products to generate significant revenues in the short-term, but they would provide them to younger customers demanding the service.

One banker said they did not expect to make money on BNPL, but were concerned about the threat posed by the FinTechs if they branched into offering other services.

The banks have sought to position their products as responsible alternatives to incumbents, who are facing questions around the affordability of their loans.

Traditional BNPL transactions have mainly relied on soft credit checks, which attempt to gauge creditworthiness but are not visible to other lenders and leave no permanent record. That has led to concerns that users can take on debt from a number of companies.

By contrast, banks offering BNPL do a more complete search of a consumer’s financial record. These harder credit checks are recorded on applicants’ credit history and can impact credit scores.

NatWest’s BNPL option, which launched in June, is available to account holders over the age of 18 earning at least £10,000 a year, in line with the criteria for its basic credit cards.

In June, the government announced plans to strengthen rules on the sector, including requiring that firms checks that customer can afford to use their products. However, regulation is due by 2023 at the earliest.

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