Amid the Covid-19 pandemic, many cash-strapped consumers turned to various means of accessing credit. But as Kate Moody, lead customer strategist at fintech specialist 11:FS explains, we need a better system for borrowers.
"Earlier this year, the Financial Conduct Authority recommended that ‘Buy Now Pay Later’ (BNPL) firms should be regulated. While this is a welcome first step, there’s lots more to be done if we want to help consumers manage credit successfully.
Huge growth over the last year has shown that BNPL services provide an undoubtedly attractive service for consumers. According to the FCA’s estimates, the UK’s sector more than trebled in size in 2020.
To date, however, BNPL firms like Klarna and Clearpay have been able to decide for themselves who to lend to and what to do when customers miss repayments.
As a result, barriers to stacking up unrealistic credit lines across multiple different providers are minimal. And when things go wrong, consumers’ options for external mediation are limited.
With the pandemic placing pressures on household finances, helping consumers to better understand debt matters more than ever.But now - after pressure from campaigners and influential industry figures like Martin Lewis - regulatory loopholes will start to close.
The FCA review in full, however, echoes what many of us who speak to customers about the real-life experience of using credit already know. Affordable, regulated credit has long been the preserve of the financially comfortable.
Outdated credit reporting systems skew towards past mistakes over present day rehabilitation. Digital self-serve journeys make credit access more convenient for the majority but pose real risks for vulnerable customers.
And with the pandemic placing pressures on household finances, helping consumers to better understand debt matters more than ever.
The good news is that we increasingly have tools at our disposal to help customers establish more sustainable relationships with credit. Open Banking has created a regulated environment for sharing financial information that can help lenders estimate what consumers can afford.
Fintechs are offering promising new services (I have a bit of a crush on a US-focused automated savings app called Digit that allows customers to set up smart savings pots that are automatically passed on to creditors).
We need to make it easier and more affordable for people to access independent financial advice.Employer Salary Advance Schemes like Hastee and Wagestream aim to replace payday lenders by allowing workers to draw down on earned salary more flexibly.
And social attitudes towards issues that prompt and perpetuate debt are also shifting. Covid, for its many downsides, has highlighted how mental health problems and poverty impact modern day Britain.
The UK is lucky to have a regulator that embraces and adapts to innovation in the financial sector. Beyond the BNPL-focused headlines, the wider review gives me confidence that other dynamics of the debt sector will remain under pressure to evolve.
We need to make it easier and more affordable for people to access independent financial advice. Creditors and debt collectors need to create human-centric repayment models that flex to variable incomes and unexpected events.
We need to provide more empathetic paths back to credit worthiness for consumers trying to correct past mistakes. And all of these changes need to be delivered in partnership with organisations closest to the most vulnerable consumers that we’re currently under supporting.
But change needs to start somewhere. And regulating Buy Now Pay Later seems a pretty good place to begin.
Kate Moody is lead customer strategist at 11:FS
