28 May 2021

Regulate badly now, pay later

By Dom Hallas

Picture two financial services products.

One charges on average around 20% APR, cost Britons £5.7bn in interest and fees in 2020, and often entails an annual fee just to use it.

The other charges no interest, has saved British people money based on comparable alternatives, and is just there for you when you checkout online.

Which one do you think has made serious journalists collectively lose their minds over the course of the past year? One commentator called it “a potentially insidious normalisation of acquiring online exactly what you want when you want it”, another described a “debt time bomb”, and a third said it was creating “a new generation of debtors”.

The answer is, of course, the second one – known as Buy Now Pay Later (BNPL).

What has got these journalists so vexed? And why don’t they boil with such righteous indignation at credit cards (the first of our financial service products), which routinely screw consumers and systematically exploit those caught in a spiral of debt.

The answer can be found in the language. That of Mary Whitehouse-esque moral panic. Some 75% of BNPL users are women, 25% are aged 18-24, and 90% of transactions involve fashion or footwear. To many commentators, these aren’t acceptable purchases to finance using interest-free credit. They expect young people to save up their pocket money in a little porcelain piggy bank and wait until they’ve got enough pennies like good little boys and girls. According to one op-ed this week, using BNPL services reflects Generation Z’s vice of “instant gratification”.

In contrast, you have the credit card industrial complex. Where young people are encouraged to use credit cards to build their credit rating to borrow for a mortgage on a house they can’t afford anyway. Where cards are framed as the sober sensible choice of adults for big important purchases like golf clubs, a new lawnmower or that pair of leather driving gloves. My dad might use it to collect points for airport lounges, but his credit card quite literally offers a worse experience by almost every metric. So who are the real victims here, the Gen Z BNPL users or the credit card boomers?

Of course I’m half joking – but there’s a serious point to this. We all need to call time on the lazy stereotypes and (frankly) sexist, ageist garbage in order to think about the real challenges in the market that may otherwise go unaddressed.

We need to start by acknowledging there was a problem to begin with – that consumer credit wasn’t easily and cheaply accessible to all. BNPL is solving that problem for consumers and we can’t throw the baby out with the bathwater. In a telling comment, one analyst railed against the “misaligned incentives” of BNPL providers charging retailers instead of consumers for the credit used to buy their products. In other words, it’s only a level playing field to operate a system where you screw consumers directly like BNPL’s competitors – coming up with a more innovative system that doesn’t rinse consumers isn’t fair to the old guard of the credit industry.

At Coadec, we’re working on new models to address not just the sensible shift of BNPL into the remit of the FCA, but also the much needed reform of the Consumer Credit Act which was first introduced in the 1970s.

This starts with mandating affordability checks for BNPL. Some providers still don’t do this and these cowboys need rooting out. But despite what the big three credit bureaux say – affordability doesn’t just mean a ‘hard’ credit check. It’s in their interests to insist on this because they charge providers for each check, and receive commission on referrals for credit cards and loans. Talk about ‘misaligned incentives’…

If the big three can’t come up with a workable alternative then it’s them that needs reforming, not consumers that should suffer an intrusive check just to buy a few t-shirts from ASOS.

So it’s easy for commentators to raise the moral alarm. But if a market is broken, it won’t be fixed by wagging the finger at younger consumers. We need credit to be taken back from the cartel of the big three, we need innovative products to help consumers access the credit they need, and yes, we need proportionate regulation as well. But buyer beware: if we regulate badly now, it’s not just younger consumers that will pay later.

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Dom Hallas is the Executive Director of The Coalition for a Digital Economy (Coadec)

Columns are the author's own opinion and do not necessarily reflect the views of CapX.