When Buy Now Pay Later (BNPL) first emerged in the UK market, several of these companies focused heavily on recruiting small businesses in the ethical and sustainable space – claiming to solve a key problem for these brands and their consumers.
Ethically made products are typically more expensive than their mass-produced, unsustainable counterparts, and while consumers say they’re willing to pay more, their behaviour at the checkout doesn’t always reflect this – in what is commonly referred to as the ‘attitude behaviour gap’.
Allowing customers to satisfy their instant gratification, purchase higher-priced products that align with their values, and spread the cost after purchase interest-free was the promise of these BNPL fintech firms.
For many ethical brands it was an appealing offer. Educating consumers about the true cost of items they can buy cheaper from bigger retailers is a laborious task that doesn’t always result in many sales. Especially for brands targeting millennials and Gen Z (basically anyone under 40) – who are the most values-driven demographics (Almost half of 18 to 24-year-olds chose environmental issues as one of the UK’s three most pressing national concerns), but don’t typically have huge disposable incomes.
BNPL company Clearpay found that 60% of these generations don’t own a credit card, explaining why so many of these fintech companies have targeted their marketing at the under 40s and the ethical brands that most appeal to them.
However, many of these companies have also formed partnerships with global fast fashion brands, raising an ethical dilemma for many values-driven small businesses, who have had to question whether Buy Now Pay Later is just encouraging the same type of unsustainable overconsumption they are trying to tackle. It’s the age-old moral dilemma that all ethical businesses face – balancing the need to generate revenue with selling in an ethical and sustainable way to change consumer behaviour.
While some ethical brands chose to avoid BNPL altogether, others embraced it – preferring to work on changing the system from within. Ultimately this was a personal choice for brands to make, and with Clearpay reporting that their brand partners see, on average, a 20% increase in cart conversion and a 25% increase in order value, it’s easy to understand why some ethical brands opted in to help their products become more mainstream.
However, BNPL is now presenting a new ethical dilemma for values-driven brands, which could quickly become a significant reputational risk.
The dangers of unregulated lending
Many BNPL companies don’t charge interest if repayments are made on time, and credit is often available through them without affordability checks – relying only on a “soft” credit search to make the checkout process quick and convenient. In fact, the companies often describe themselves as a “money management tool” rather than a form of credit, but this has been heavily criticized as misleading.
Consumer body Which? have said that these firms pose an “immediate risk” because consumers that use them aren’t always aware that they are taking on debt, or might be liable to significant fees and damage to their credit rating if they fail to make the repayments.
A review by the former Financial Conduct Authority (FCA) interim chief executive Chris Woolard found that more than one in ten customers of a major bank using BNPL were in arrears, with the risk of consumers taking on unaffordable levels of debt increasing as these companies look to expand to higher-value retailers and offer their service in store too.
The BNPL market is worth an estimated £6.4bn a year in the UK, and is used by around 10 million shoppers. But with the cost of living soaring, Citizens’ Advice have warned that one in twelve Britons are using BNPL to cover everyday essentials like groceries, with young adults, those in debt, and people on Universal Credit twice as likely to use these unregulated lending schemes.
Labour MP Stella Creasy, who played a prominent role in the stricter regulation of payday lenders like Wonga, has called BNPL the “latest example of legal loansharking” and more than 70 cross-party MPs have warned that BNPL could be the “next Wonga waiting to happen”. This has fuelled calls for urgent regulation of Buy Now Pay Later, in line with the regulation that other consumer credit companies have to abide by.
The FCA has already intervened, using consumer law to enforce a change in “potentially unfair and unclear” terms and conditions around cancellations and late fees, and this is just the start of stricter regulation coming into force.
Bringing these firms under FCA regulation means they will have to conduct proper affordability checks and ensure that customers are treated fairly if they are struggling to make repayments. It will also give consumers the right to complain to the Financial Ombudsman Service.
In February 2022, the FCA began a recruitment campaign to recruit a number of senior roles to expand its push into oversight of credit, debt and consumer finance.
Stronger regulation is coming. What does this mean for ethical brands?
Regulation in this space is a good thing, and several BNPL providers have broadly welcomed it in their media statements – but they will undoubtedly be preparing for the PR backlash that greater regulation will bring, and ethical brands using their services should be doing the same. As scrutiny of the ethics behind BNPL steps up, association with these payment schemes becomes a growing reputational risk for brands.
By positioning themselves as a payment method rather than borrowing, BNPL have been able to gloss over the fact that their users are getting into, sometimes unmanageable, debt. As they are forced to become more transparent, it’s likely that more consumer case studies will hit the headlines, and they will have to weather a storm of negative press highlighting the consequences of lack of regulation so far, which will call their values into question. Unfortunately, this may do damage by association for ethical brands that have used them (especially considering, when speaking to the press, BNPL users are likely to name exactly where they shopped and what they purchased).
These companies have focused their branding and marketing on reaching millennial and Gen Z women, making shopping quick, convenient, fun and thoughtless. According to the FCA 75% of BNPL users are women aged 18-24, with 90% of transactions involving fashion and footwear.
Negative press about these companies is likely to emotionally resonate most with women because they have been the target of this marketing for so long, and will likely see themselves reflected in any case studies. The success of these companies has been achieved by using their branding to appear harmless and risk-free – a veneer which is about to crack, potentially leaving a sour taste in users’ mouths if they feel they’ve been duped into harmful debt.
So if this is a target demographic for your ethical brand and you’ve been associated with BNPL, now is the time to think how your audience may react as regulation develops and more stories of damaged credit scores and debt collectors start to emerge.
Klarna in particular have already invested heavily in positioning themselves as a values-driven company, with a stereotype-smashing OOH marketing campaign designed to position them as a responsible solution with their customer’s best interests at heart. While their public-facing marketing campaigns and the promises made on their website talk about putting the customer first and focusing on protecting their best interests, how the company responds as regulations get tougher will prove whether this is genuine or purpose-washing. And the problem for ethical brands is, if one area of your business (including the companies you partner with) is found to be purpose-washing, it causes consumers to question what else you’re doing wrong. A purpose-washing scandal can be the quickest way to lose hard-earned trust and credibility, and ethical reputations can be expensive to restore.
Refinery29 found that 68% of their readers do not think that BNPL is a good thing.
If your audience starts to see BNPL as irresponsible, you don’t want them thinking the same of you.
It’s time to reassess your pricing and targeting strategy
There’s no denying that for the ethical brands that have chosen to use them, Buy Now Pay Later payment methods have played a significant role in making ethical and sustainable price points more appealing to the mass market, and helped these brands to target younger, more values-driven demographics – who previously may have loved the brand’s vision and values, and engaged heavily on social media, but struggled to convert to sales due to price point.
To protect themselves, it’s essential that ethical brands using these payment methods now assess their reputational risk going forward, and continue to monitor it and adapt as regulation comes into force. And part of this assessment process must also include your pricing strategy and audience targeting too.
While Buy Now Pay Later companies are currently thriving, impending regulation isn’t their only problem. These companies rely on low interest rates, and with interest rates on the rise, their margins are getting tighter. Klarna has already acknowledged interest rates rising as a “significant risk” to the company’s financial position.
The reason these companies have avoided regulation in the UK so far is because of a loophole in the Consumer Credit Act, which says that if a product is no-interest and relatively short-term, it doesn’t need to be regulated. So it’s unlikely that they will start charging interest to consumers. Which means that to tackle tightening margins, the cost to retailers might increase, at a time when they are facing tighter margins too.
Even if you do decide to weather the reputational risk (and there are mitigation measures you can put in place now to do so) and continue using these BNPL companies for now, you need to be prepared for if the risk level or financial position changes.
If a significant portion of your overall sales, or your sales from one demographic (for example, Gen Z women), comes through BNPL, then switching this off would have a significant negative impact on your sales almost immediately. Likewise, if BNPL has significantly increased your average order value, you may struggle to maintain those levels if you remove it as a payment option.
Marketing and communication risks are rarely confined to just one department. Even in the smallest of businesses, a risk in one area usually requires strategy adaptation in another. If as an ethical brand you have been using BNPL, it’s time to gather the data on how that has affected your sales, which audiences it’s had the most impact on, and start considering how you can target them and achieve those results in other ways.
