Buy Now Pay Later regulation is a step forward
It was good to see Tuesday that Christopher Woolard’s review of unsecured credit identified the need for a wider range of choices for consumers.
While there are worrying signs that Buy Now Pay Later is causing some consumers to rack up problematic debt (just search Klarna on Twitter or TikTok to see people complaining – sometimes even bragging – about their outstanding balances), others use the services without problems.
Credit is changing rapidly
Obviously the FCA wants to stand out, so it cannot be blamed for dropping the ball like it has been with Wonga and other payday loan providers. It would therefore be tempting for the government or regulator to crack down on the sector and ignore the problems elsewhere.
Fortunately, the exam recognizes that BNPL is only part of a rapidly changing credit landscape in which many consumers cannot find or understand all of their options.
It seems that the problem is not necessarily that consumers are not eligible for other forms of credit, it is that they do not know them well enough and that they are not as easy to use as BNPL, that you simply add at the checkout.
More options are needed
Mr Woolard noted that there could be improvements in the mid-cost credit market. Some lenders, he said, are discouraged from offering products with, for example, an interest rate of 10 percent, for fear of being viewed as predators, when in reality that would be a problem. much better option than a high cost loan such as payday loans.
He added in the review that traditional lenders such as large-scale banks have historically been reluctant to offer alternatives to high-cost credit. “Greater involvement of these lenders directly in non-senior credit markets, with their expertise and economies of scale, is essential to stimulate competition and innovation. “
In other words, is it any wonder that fintech challengers like Klarna and Clearpay have managed to take the market by storm? They are easy to use and much more suited to the way many buyers buy.
Overdraft image problem
Overdrafts should play a bigger role here. One of the arguments for why Buy Now Pay Later services are useful is that they can help someone make an emergency purchase – like replacing a stolen bike or damaged furniture – and spread the costs. But why aren’t consumers using overdrafts to remedy this? One reason is that some are already in arrears, as FCA research has revealed, but for the rest I think there is a case of scary headlines impacting decision-making. .
Last year, the FCA banned banks from charging higher fees on unexpected overdrafts than expected overdrafts, which was good news. But it had a side effect: most providers place their interest rates up to around 40 percent. I asked Mr Woolard about this on Tuesday, and he trotted the usual line on how the consumer is better off overall, as the hidden charges could end up totaling a much higher rate than that.
While this is absolutely true, I still think there is an image issue here. If you have one option that says 40 percent and one that says no interest, no charge, which one would you choose?
Banks and other lenders need to do their part for the market by adjusting to the new reality of how consumers use credit, and do a better job of communicating what they offer.