The growth of BNPL among younger audiences demands a digital-first approach to debt resolution
It’s no surprise that BNPL products have surged in popularity among younger consumers who value the flexible and cheaper payment options offered for fashion and technology products.
According to a recent survey of 4,000 respondents, approximately two in five young adults aged 16-24 used BNPL services last year, with 57% using it to buy clothing and 47% for tech items.
BNPL can be a very useful form of credit for purchases (if used responsibly), though like with any form of credit there are risks involved particularly across younger audiences with potentially lower levels of financial literacy or vulnerable customers, that can ultimately lead to problem debt. In light of this, it will be crucial for BNPL providers to ensure their debt resolution approaches reflect the digital, user experience-driven nature of their own products and services so they can truly support customers who face financial difficulties.
In this article, I will explore the growth of BNPL products in recent years, its impact and usage amongst younger consumers, and how digital-first approaches can help providers improve their debt resolution processes for a generation of digital natives.
The BNPL Boom
The basic concept of ‘Buy Now, Pay Later’ existed long before any fintech innovation, with consumers using point of sale finance products to purchase a variety of ‘big ticket’ items over an agreed period of time. In more recent years however, newer, technology and digital-driven BNPL products have taken this instalment concept further, combining it with no interest-rates and embedding it within the customer journey to offer credit on a number of everyday items.
Predictions are suggesting that UK BNPL spending could reach £40bn over the next four years, which has led both fintechs and traditional banks to build BNPL services to meet rising demand. Neobank Monzo, for example, became the first UK bank to roll out their BNPL service ‘Monzo Flex,’ with a £3,000 spend limit, as well as high street bank Santander which is set to launch its BNPL app ‘Zina’, to rival existing BNPL products.
In more recent years, Klarna helped to popularise BNPL for online purchases of items such as fashion and technology. And even more recently, we've seen BNPL expand to other areas, such as food and groceries. BNPL providers like Zilch, for example, have partnered with UK supermarket Iceland while Flava now offers a number of BNPL services for online food shopping. This expanding use of BNPL particularly highlights the growing demand for its use to cover every facet of a consumer’s spending experience.
And with BNPL allowing for access to purchases that may have been previously unaffordable, it's unsurprising that younger generations have been drawn towards its use.
In addition, recent studies have also pointed towards younger individuals moving away from higher cost credit cards, with GoCardless revealing that 87% of 18-24 year olds avoid credit cards as they often have unappealing high-interest rates. As a result, BNPL products from providers like Klarna, ClearPay, and PayPal credit are far cheaper alternatives to these ‘traditional’ forms of credit.
Furthermore, with approximately two thirds of Millenials and Gen Z living paycheck to paycheck, and as the cost of living skyrockets, BNPL is offering this audience the convenience and financial freedom to get by.
A New Type of Debt
While a convenient new method of paying for goods, it is important for consumers to remember that BNPL is still a form of credit and therefore comes with a risk of debt (as do credit cards or personal loans).
With BNPL, consumers can choose to pay now, later, or in instalments at their convenience. If a payment is missed, however, they will be owed to the provider. BNPL debt differs from ‘traditional debt’ with some providers offering no interest and no late payment fees. For younger consumers looking for a cheaper alternative to traditional credit, BNPL can therefore be an alluring payment method; however, failure to regularly pay on time can result in their debts being passed on to debt collection services.
BNPL companies are certainly at the cutting edge of payment innovation with simple, accessible credit and digital-first experiences. However, with bad debt being an unavoidable result of their offering, it is vital they ensure their debt resolution practises take a similar approach.
A New Type of Debt Resolution
The success of BNPL has brought with it a ‘new’ type of debt, requiring new solutions beyond ‘tried and tested’ debt collection methods.
However, many businesses today are still beholden to outdated debt collection agencies who find it challenging to recover outstanding debts. Similarly, consumers lack control throughout the debt resolution process due to inflexible repayment options, an absence of digital tools for managing their debts and antiquated communication methods. These can be in the form of intimidating emails, cold calls or in some extreme cases, turning up on the doorsteps of vulnerable customers to try and collect cash.
A study by innovation foundation Nesta revealed that 90% of people were left on hold when contacting debt collectors. A further 91% could not solve their issues through one correspondence, demonstrating just how ineffective traditional approaches are.
The path to fair and effective debt resolution for the 1 in 8 Gen Z users of BNPL services who are being chased by debt collectors must utilise communication methods and technology that best suit their lifestyles.
The outdated ‘one-size-fits-all’ approach to debt collection has time and time again proven ineffective for lenders and their customers.
Debt resolution not only guides customers towards financial freedom but is also highly beneficial for lenders.
BNPL is here to stay and has opened up a world of possibilities for a generation battling some of the highest interest rates, inflation and financial insecurity. But equally, consumers who are accruing debt through this payment method should have access to seamless, empathetic and digital ways to resolve their debts on their terms.
