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Subscription Finance: What’s Next for Consumer Borrowing?

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By Neil Kadagathur, Founder and CEO of Creditspring

Neil Kadagathur - Global Banking | FinanceFor people around the world, the COVID-19 pandemic caused a seismic shift in the way we manage our money, make payments and even borrow. At a time when government-enforced lockdowns forced physical bank branches to close their doors, and people to stay at home, many turned to online banking and digital providers to manage their finances – something that was increasingly needed with many household incomes hit hard. As a result, new payment and borrowing methods have gained considerable momentum, including Buy Now Pay Later (BNPL).

Now, as we begin to emerge from the epicentre of the pandemic, it’s clear that this mass shift to digital isn’t simply a temporary fix, but a permanent change that will form the foundations of the financial services we use long into the future. But how will this continue to evolve?

Buy Now Pay Later: the dark side

Buy Now Pay Later, which enables individuals to make payments via a short-term loan, most commonly repayable through a series of instalments, has exploded in popularity during the last year. The pandemic created a fertile environment for increased usage of BNPL, with the prospect of delayed payment giving people increased flexibility during what was an uncertain financial time for many. Indeed, during 2020, it is estimated that over 10 million UK consumers bought products or services via a BNPL plan, with 44% of shoppers citing ease and convenience as the main attractor, closely followed by the ability to spread costs over time. Today, the sector has a growth rate double that of bank transfers and more than triple that of digital wallets, and is estimated to be worth a sizeable $166 billion by 2023.

Despite its impressive momentum, it must not be overlooked that BNPL is, at its core, a form of borrowing, not payment, and this comes with risk. A recent survey found that 62% felt that using BNPL made them spend more money – a hugely concerning statistic, and something that has potential to be severely detrimental to the financial stability of millions if left unchecked. Fortunately, this sentiment was shared by the Financial Conduct Authority (FCA), which published its findings about the unsecured lending market in ‘The Woolard Review’. Shortly after the review, in a welcome regulatory move, the UK government said it would require BNPL providers to conduct affordability checks on consumers.

Aside from encouraging excessive spending, it seems that BNPL also leaves a number of borrowers feeling misled about the hidden charges, with terms and conditions taking up to an hour to read and some banks charging almost 4% if a BNPL payment is made using a credit card. Furthermore, many customers aren’t entirely sure what the method entails, with 42% not fully understanding what they are signing up for.

While there can be little disputing that BNPL offers a quick, easy, and flexible short-term borrowing solution, there is a dark side that few consumers are made aware of. Many borrowers, who were unaware of the fine print, are now left with debt that they will struggle to repay. Following research findings showing that four-in ten consumers who’ve used BNPL in the last 12 months are struggling to repay, as many as a quarter regret paying using BNPL platforms, and many say they cannot afford repayments or are spending more than they expected, Citizen’s Advice, a network of legal, money and consumer groups, referred to BNPL as a ‘slippery slope into debt’.

Time for a new approach

It is time to take a new approach to consumer lending. An approach that prioritises transparency, with no compromise to the flexibility and convenience that makes BNPL so attractive. Not just this, but it must cater to the 12-15 million ‘near-prime’ borrowers in the UK who find it difficult to access mainstream credit products. The danger is that borrowers whose credit files are thin or in need of repair might rely too heavily on unregulated and high-cost lenders that offer BNPL, payday loans or unauthorised overdrafts.

This is where subscription finance comes in, offering a responsible, regulated, and transparent option for creditworthy borrowers. According to a survey of Creditspring members, 28.2% of borrowers feel that being upfront about hidden fees and charges is the number one thing a lender could do to improve the borrowing experience.

In the same way that BNPL tapped into consumer demand for more flexible payment options, subscription finance meets a fast-growing demand for increased transparency. Much like a streaming service or monthly mobile payments, a credit subscription service involves paying a small, fixed fee on a regular basis in return for interest-free loans and short-term credit. These small, regular payments allow consumers to avoid paying interest, and to remain in total control of their finances.

Subscription finance: hailing an era of consumer-safe borrowing

With all the noise and excitement currently surrounding the future of finance, there is one thing we must not ever lose sight of: the customer. To date, while BNPL has provided increased flexibility for many during turbulent economic times, from a broader perspective it has missed the mark when it comes to prioritising the best interests of the individual. Subscription finance offers a fairer, more transparent alternative for consumers.

By prioritising transparency, preventing customers from a spiral of debt and being upfront about the cost of credit that is received, the subscription finance model rightfully puts the power in the hands of the borrower. This is the beginning of a new, more open and trustworthy era of consumer borrowing. It is a revolution that is long overdue, and I can’t wait to see what happens next.

Global Banking & Finance Review


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