BNPL three times as popular as pay day loan lending

26th March 2024

A new report by Lenvi has revealed the growing importance of brand and trust for borrowing decisions and AI innovation, a dip in the number of people factoring green credentials into their decision making and the growing popularity of Buy Now Pay Later (BNPL).

The report reveals that borrowers are placing more emphasis on brand than ever before, with consumers putting equal weight in brand reputation (38%) and interest rates (39%) as the top things they look for in a lender – more than any other factors. This is compared to 2013 when almost half (45%) said they would borrow from any lender as long as they were happy with the interest rate, with brand loyalty rarely factoring into decision making.

Lenvi’s first report in 2013 revealed that concerns over ‘payday loans’ were high, with one in ten (12%) considering this form of easy-access, high interest finance. The clampdown by the FCA in 2015 seemed to curb these practices. Instead BNPL, a largely unregulated, easy access borrowing model that is usually built into the consumer shopping process, has taken over in popularity. In fact, two in five (40%) have used it within the last five years, increasing to almost half (47%) for people under the age of 44 and seven in ten (70%) for 18-24 year olds. It is even more popular than credit cards among Gen Z and is gaining in popularity among older age groups7.

While interest rates on BNPL are nowhere near the levels offered by payday loans, concerns centre around people’s inability to track and manage repayments, particularly when people have multiple loans running in tandem – known as ‘loan stacking’. Only one-in-four (25%) have said using BNPL has made it easier for them to manage money.

The popularity of BNPL is particularly a concern for vulnerable groups who, the report reveals, are up to twice as likely to use BNPL.

Over half of those who have a mental health condition (55%) and those who have a cognitive disability (52%) have used BNPL compared to just one in three (34% / 36% respectively) people who do not. Previous research suggests that the uptake of BNPL among these groups is in part linked to impulsive tendencies linked with their conditions. People with certain cognitive disabilities may also struggle with accessing and understanding complex documentation usually associated with finance applications, which explains the appeal of the frictionless BNPL journey. In fact, the report reveals that people who have disabilities, mental health conditions or longstanding health conditions are up to 27% less likely to have had a credit card in the last five years. This highlights the growing need for buy now pay later to be regulated to avoid financial harm while improving accessibility and financial education for vulnerable individuals.

BNPL is also more prominent among ethnic minorities, with six in ten (60%) ethnic minorities having used it to borrow money compared to just one in three (35%) white people. Research suggests that people from ethnic minorities are more likely to seek help from financial providers, but BNPL allows these groups to bypass systems and processes that have historically been exclusionary. The report also reveals that they, as well as people with cognitive disabilities and mental health conditions, are more than twice as likely to rely on family and friends for a loan indicating mistrust, exclusion and a need for further support for these groups.

Sebrina McCullough, Director of External Relations at Money Wellness, said “Whilst the findings of Lenvi’s survey are concerning, they’re also not surprising and very much mirror what we’re seeing. BNPL makes it easier to spend especially when no other form of credit is readily available to you. 

“It poses a particular risk to people with mental health problems, who are often more prone to impulsivity and memory loss. Keeping on top of payments is a struggle, especially if they’re juggling several at once.

“We’ve supported customers who felt they were being chased relentlessly for BNPL debt, which can also worsen mental health conditions. And we are concerned that without regulation – that now won’t be happening before the election – and proper protection more and more people will find themselves spiralling into a cycle of debt.”

Richard Carter, CEO, Lenvi says “In today’s increasingly competitive FS market, brand is king. Borrowers are telling us that, nowadays, a race to the bottom only holds so much weight with them – even at a time when interest rates are far from the lows we’ve seen over the last decade. In turbulent times, people look for certainty. In lending, that means looking to lenders they can trust and those they know will treat them fairly when the going gets tough. If you can balance the opportunity afforded by your brand with interest rates then you’re going to win with borrowers.”

Six in ten(59%) home owners are worried about finding an affordable mortgage rate when their current deal comes to an end, with people more likely to switch in 2024 (80%) as in 2022 (60%). Furthermore, certain groups are more likely to find it difficult to find a financial product that matches their financial situation.

 Carter added “The role that AI could have in opening up the mortgage market to those who are worried about their rates or individuals who are typically excluded from the market is clear. For example, research shows that half (49%) of consumers would be pleased to see green lending innovations, such as lower mortgage rates tied to household energy efficiency. Lenders need to use technology to rapidly innovate and launch much needed products that will support people from a range of backgrounds and with vulnerabilities.”

The adoption of Open Banking certainly seems to be growing, with 65% of people considering giving a lender temporary access to their transaction history if it could lead to a more personalised rate – up from 60% in our 2020 report. The implementation ofOpen Banking technology from lenders certainly makes customer interactions more seamless, through spending less time gathering data and more time understanding how to support customers. This suggests that whilst there is growth potential, winning over consumer trust will be essential this year.

Carter concluded “Open banking has been the flavour of the decade in financial services. Now that the advent of AI is well and truly upon us, it’s understandable that some consumers are nervous. However, Millennials and Gen Z are more than ready to take advantage of the benefits AI can afford. With a balanced grounding in regulation and if lenders can demonstrate that consumers can genuinely prosper, 2024 will be an exciting time for mortgage and lending innovation.”

Lea Karasavvas, member of the Society of Mortgage Professionals board, said “The cost of living crisis we currently find ourselves in, has led to a lot of innovation from lenders to navigate the payment shock that will have been felt by many. This innovation has seen lenders go longer on mortgage terms to 40 years, some lenders increasing their interest only proposition, other lenders entering the joint borrower sole proprietor space, to name but a few. Lenders such as Virgin, have launched five-year fixed rates with a two-year tie. Halifax and Virgin have also proposed new products called Own New Rate Reducer significantly reducing the rate paid by borrowers on new builds by utilising the developers incentive budgets on mortgage rate reductions. Skipton also launched a 100% mortgage with certain caveats last year, also.

“With an ever evolving market it is no wonder 15% plan to look online, and 83% will go to a broker. It is also understandable that only 15% of Gen Z understand their mortgage as so much has changed and evolved of late it will have generated confusion.

“The role of a broker has never been more pivotal and crucial, and the cost of living crisis has enhanced the broker/borrower relationship hugely as brokers try to navigate their clients through a payment shock that many would never have witnessed before.”