It’s hard to buy anything in Australia today without a prompt from a buy now, pay later (BNPL) provider, no matter how inconsequential your purchase. BNPL brands are ubiquitous, even as their share prices are in free fall accelerated by a changing regulatory environment and staggering mountains of bad debt: over $1.05 billion in 2021 alone. Add to that interest rate rises cooling the economy and BNPL services have been described by behavioural scientists as a ‘perfect storm’ of
’ of instant gratification, with the delayed pain of payment encouraging people to spend more. But there is a darker story that retailers might want to consider – one of lasting financial damage. Last year, I looked at the BNPL space and questioned whether responsible brands had a responsibility to consider their customers’ wellbeing and longer-term needs, beyond those of ease and gratification. I suggested a sustainable business model relies on designing closer relationships and that designing for trust is a longer game that will pay dividends for your business. I urged retailers to think about their role in all of this before lasting damage was done to brands promoting BNPL – and before the regulators stepped in. Fast-forward a year and people across Australia are beginning to struggle with the financial hangover. Many are looking at the brands involved in a new light. So if you’re a retailer offering BNPL, should you revisit the decision to do so? Let’s look at the facts. Business is booming but at what cost? Business is growing at a blistering pace for BNPL operators but that’s not necessarily a good thing. In the US, for example, data shows that as the customer base grew, people moved from buying big-ticket items (like a Peloton bike for home exercise) to daily staples and smaller items, with 4 in 5 American consumers using BNPL on everything from clothing to cleaning supplies. In a paper on the need for regulation in the space, financial services consultant Marshall Lux noted: “When people start buying household goods on credit, that signals a problem.” This trend is likely to spell trouble for the financial wellbeing of an entire generation, with 18- to 44-year-olds the most enthusiastic adopters of BNPL services. They have more accounts, on average, than older consumers. Plus, Millennials and Gen Z report using BNPL to avoid the high interest associated with credit cards, but, all too often they fail to pay their BNPL charges in a timely fashion so they end up paying interest anyway, says John Cabell, director of banking and payments intelligence at J.D. Power. Add to that 70 per cent of customers admitting to spending more than they would if they had to pay for everything upfront, and you’ve got the recipe for a bubble, especially as the cost of living climbs faster than wages rise. The real kicker is that missing payments will end up affecting the credit ratings of young people, with lenders now assessing customers’ BNPL commitments in credit applications. Here in Australia, financial services minister Stephen Jones has been clear that Labor will amend national credit laws to encompass the BNPL sector, telling The Australian Financial Review, “If it looks like a duck, walks like a duck, sounds like a duck, it’s a duck – and it should be regulated as a credit product.” Is the BNPL party over? So where does all that leave the sector? As of December 2021, Zip’s total outstanding borrowings stood at $2.4 billion; in July, UBS found the company’s total bad debt was around 20-30 per cent of the big four banks’ debt, despite the big banks’ loan books being 300 times larger. As debt in the sector continues to balloon, investors are realising that the once market darlings are no longer a safe bet. Commonwealth Bank-backed giant Klarna’s valuation dived from US$45.6 billion to US$6.7 billion ($10.8 billion) in just 12 months. “The market has been so unsustainable, with no profit, no road to profitability and increasing pressure from regulatory bodies,” as Bradford Kelly, managing director of Payment Services, put it. BNPL has gone from something light and frothy to leaving investors with a nasty headache, as well as creating potentially long-term issues for consumers. It’s a double whammy for brands relying on income from BNPL providers to support their businesses. Retailers’ reaction and responsibility If you’re one of those brands, what should you do? This brings us back to the point of my previous piece: what is your responsibility? Now that BNPL is firmly entrenched in the retail model, it’s going to be hard to separate the impact on your bottom line from the impact on your customers. But if you want to have a sustainable business model, you need to do exactly that. Start by talking to your customers. Are the majority using BNPL services responsibly? It’s all too easy to overextend yourself at the mere click of a few buttons, especially if you aren’t financially savvy. Can you educate them to do so or, for the benefit of your customer’s wellbeing, would you be better off limiting or removing the service from online platforms? Finally, consider this: if the BNPL bubble bursts, and looking at the bad debts of the companies in the space it’s certainly a possibility, you risk being left short. The second risk is customers who get themselves into hot water after using BNPL services to shop for your brand. Becoming associated with that bad experience may be hard for your business to recover from. The lure of instant gratification comes at a price for consumers and retailers alike. But that doesn’t mean we can’t break the cycle.