Finance is a force for good in the cost of living crisis

Todd Latham
23 January, 23

We’ve all seen what’s happening with the UK economy. Costs are rising across the board while real pay has dropped 3%. This is causing household budgets to tighten, which in turn has caused the retail sector to go into decline. Retail sales have been dropping month-on-month since July.

But the sector is resilient. Lessons have been learned from the 2008 financial crisis and the COVID-19 pandemic. Shrewd retailers know now is the time to cut bad costs, create extra headroom and close the needs-offer gap to not only maximise sales in the short-term, but future-proof their businesses beyond the recession.

In all of these aspects, one of the savviest investments in the current environment is checkout finance, better known as “Buy Now, Pay Later” (BNPL). BNPL allows customers to finance their purchases by paying them off in instalments, similar to how they would with a credit card. The key benefit, however, is that BNPL charges significantly less than the average 22.2% APR (which has been steadily increasing throughout 2022), with many services offering interest-free credit.

The benefit to the customer is having extra choice in the ways they fund purchases at a difficult time for personal finances. The benefits to merchants are also clear. BNPL has been shown to significantly improve volumes of retail sales. It has also been shown to increase average transaction values, reduce instances of basket abandonment and improve rates of repeat purchases.

Implementing checkout finance during this period of forthcoming difficulty therefore represents a force for good for both merchants and customers. However, it must be tempered with a sustainable and compliant approach.

Treading the fine line

BNPL has become a bit of a loaded term, and not without reason. The sector currently benefits from a loophole in the 1974 Consumer Credit Act that allows it to operate without stringent affordability checks and credit reporting.

This has led to a situation where some consumers have borrowed beyond their means and struggled to manage repayments. A survey by charity StepChange and Barclays Bank found that one-third of consumers have started to use BNPL more during the cost-of-living crisis, but one-third are also struggling with their repayments.

Businesses have therefore come under fire for implementing checkout finance at this time. When Klarna activated ‘eat now, pay later’ for Deliveroo in October, it caused an instant controversy. But as Klarna rightly replied, no one bats an eyelid when a customer chooses to buy a take-away with an interest-bearing credit card – why should paying with an interest-free option be treated as anything worse?

Perhaps because BNPL represents an individual credit line, with all the risk attached. And in the case of food, the lifespan of that loan will far outlast the lifespan of the purchase. Paying off one family meal over three months is not how short-term interest-free credit is supposed to be used.

What it should be used for is supporting higher-value transactions that are necessary to facilitate the lives and lifestyles of consumers during these difficult times.

Treat Buy Now, Pay Later as an affordable alternative to traditional credit

Picture the person who wants to propose on Christmas Day. They will need an engagement ring, but expect to pay around £2,000 for this. They could save. But at a time when costs are rising, by the time they gather the money, the price of the ring may have gone up. They could purchase it on a credit card. But then they would have to pay an additional 22% in the form of APR.

Here we see where checkout finance becomes not only a benefit, but an essential mechanism. This person could purchase their ring on day one, protecting themselves against future price increases, while having the option to choose a flexible, interest-free payment solution. Thus, they can enjoy their perfect Christmas. 

The retailer in this equation has acted strategically. There is no bad cost attached to checkout finance – the retailer may pay a small fee (usually 2–8%) to the lender, but they also get a sale they may not have otherwise, so they still profit. They have created extra headroom by opening a new payment line. And they have closed the needs-offer gap by giving the customer a way to pay that suits their lifestyle, making them more likely to shop again and recommend the service.

Acting responsibility

This is not an open invitation for retailers to implement checkout finance without first doing their due diligence. Buy Now, Pay Later is a legitimate form of loan, and has the potential to negatively impact consumers’ lives if not used in the correct way.

Understanding this, the UK government is taking steps to regulate the sector. That regulation is likely to take full effect in 2023. This is nothing for businesses to worry about – the government has made it clear that the shape of regulation will be no stricter than it is for other financial products already on the market. But it will tighten rules around how BNPL is communicated. The theory is that if people are more aware of the potential risks, they will make better-informed decisions about checkout finance. This is good news for all parties involved.

As a retailer, it will be your responsibility to provide these communications in a fair and balanced way. Customers should be walked through the end-to-end process of taking out checkout finance, including any potential pitfalls they may encounter. They should not be made to feel duped into taking out a loan.

Retailers should also vet their potential partners. Many providers have already started to self-regulate, for instance by reporting details of their loans to credit reference agencies. These are the kinds of lenders retailers should be interested in working with. Not only are they less likely to struggle when regulation eventually does take effect, the retailer can also mitigate the risk of receiving bad PR when they launch their checkout finance programme.

Turning a crisis into an opportunity

The UK’s economic downturn will be tough on everyone, but the retail industry has endured countless recessions in the past, and they can survive this one too. Thankfully, we have more advanced technology to support us this time around. With a strategic approach, retailers can not only support their own businesses, but support their customers too. Thus, we see not only a path out of the recession, but a way to improve brand loyalty in the meantime too. 

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