Coronavirus has had a profound impact on the way we live and the way we shop. With high street shops closed for months, millions of people shifted their spending on clothes, food and other items online.
However, the pandemic has also squeezed finances, meaning that households have far less to spend on essential items and occasional purchases. Even now shops have reopened, shoppers are trying to manage their finances in a more sensible manner.
Point-of-sale lending has risen in popularity in recent years and the All-Party Parliamentary Group on Alternative Lending has highlighted the need for consumers to have access to safe sources of credit to help them deal with any disruption to their household budgets.
Buy Now, Pay Later (BNPL) is one of the most popular ways to arrange credit and the UK sector is growing by 39% a year, according to payment firm Worldpay.
There are many ways these services help shoppers budget. When spending online, buyers often purchase the same item in multiple sizes. Point-of-sale lending services allow them to effectively try before they buy, rather than spending large sums up-front which are refunded when unwanted items are returned. This avoids them having to take out expensive emergency loans if refunds arrive slower than expected.
Research published by Compare the Market, the price comparison website, found that as many as 10 million British shoppers used Buy Now, Pay Later last year. The survey found that such services are especially popular among young people, and this can present an issue for firms trying to assess affordability. Young shoppers often have little or no credit history, making their applications harder to evaluate using traditional credit checks.
The Covid-19 pandemic has brought affordability into sharp focus. Millions of employees have been furloughed or seen their incomes fall as a result of the pandemic. The outlook for the future is also uncertain with further financial shocks expected as the furlough scheme ends. With more scrutiny from regulators than ever before, firms must ensure that they are not offering loans to customers who cannot afford to repay.
Rather than chasing customers for late fees and missed payments, firms must be proactive and make sure they are making responsible, informed lending decisions from the start.
Most Buy Now, Pay Later firms perform soft credit checks each time customers try to make a purchase. Lenders are reluctant to perform full credit checks on customers, those that are making regular purchases, as this leaves a permanent record on their credit file.
A soft check is lighter and ensures people can access credit quickly and easily. However, this method means that lenders only have a basic overview of customers, including their identity and whether they have been declared bankrupt, when making credit decisions.
Buy Now, Pay Later firms need to consider other ways they can give themselves a more in-depth overview of a customer’s financial situation.
Open Banking provides a key to unlock their customers’ financial habits and attitudes, without having to perform invasive hard credit checks. It is a secure way for users to share up-to-date financial information, such as spending habits, income, regular transactions and any existing loans.
With permission from the customer, Buy Now, Pay Later providers can use this technology to generate an in-depth overview of a customer’s financial health, giving them the ability to provide fast and accurate credit decisions.
The benefit of Open Banking is that information can be viewed quickly and easily. Buy Now, Pay Later needs more rigorous affordability checks to protect both lenders and borrowers, but cannot afford to introduce high-friction processes such as phone calls or document verification. In the fast world of online retail, customers do not want their shopping experience slowed down by unnecessarily slow checks.
There are other areas which would benefit from adopting this technology. The FCA has expressed concerns over Employer Salary Advance Schemes (ESAS), services which allow workers to access their salary in advance of payday, warning that applicants may fall into a debt trap where they are borrowing to pay off other debts.
As ESAS falls outside the regulator's remit, firms have no obligation to check affordability. But doing so has benefits for both firms and consumers.
The use of Open Banking could help providers distinguish between customers who have a legitimate need for a cash advance, and those that are in longer-term financial difficulty. Those in the latter category could quickly be directed towards debt advice and support, rather than taking out a loan that is unsuitable which could result in bigger problems down the line.
With ESAS as well as Buy Now, Pay Later and other types of point-of-sale lending, credit reference agencies have no record of when customers use these services, meaning that credit checks may not highlight cases where the customer cannot afford to repay.
Open Banking offers an ideal way for lenders to achieve the best of both worlds: aiding more sophisticated affordability and credit worthiness checks whilst avoiding lengthy delays for customers.