With struggling with soaring inflation and a cost-of-living crisis that is gripping the nation, public sector workers in the U.K. are feeling the pinch.
Latest government figures show inflation hovering around 10%, while pay rises announced by the government in July amount to a real-terms cut in wages. As the New Statesman reported at the time, a 5% increase in wages for teachers and police officers and a 4.5% rise for doctors and dentists translated into a 4% and 4.5% decrease in wages when inflation was taken into account.
Learn more: Potential BoE Shakeup in the Cards as New UK Chancellor Seeks to Control Inflation
Among the worst hit have been junior doctors who were already signed up to a multi-year pay deal that sees their wages increase by 2% per year. As a result, adjusted for inflation, that 2% effectively sees junior doctors 6.8% worse off this year.
Against this backdrop, an analysis of the financial resilience of public sector workers carried out by researchers at the University of Edinburgh found that 60% had used buy now, pay later (BNPL) loans at least once to make ends meet. In fact, one in 10 who were initially rejected for a more conventional loan went on to secure credit from BNPL firms.
While some of the success of the BNPL lenders to date has been related to just sub-prime lending, Nandan Sheth, CEO at Splitit, told PYMNTS in the August edition of the BNPL Tracker that era may be coming to an end.
Read the report: Beating Inflation With BNPL: How Merchants And Consumers Are Navigating The Cost-Of-Living Crisis
“Legacy BNPLs were able to accept more risk by lending to these subprime consumers, but today’s tighter market means many, many BNPLs are reevaluating their business model and approach,” he said.
Much has been said about the growing concerns around unhealthy BNPL use by consumers, but when used responsibly, BNPL loans can be a lifeline for those struggling to make ends meet. For example, interest-free installment-based repayment schemes can offer a cheaper way to access credit than traditional bank loans and credit cards, making them a valuable financial tool for public sector workers living paycheck to paycheck.
However, as Sheth indicated in the recent BNPL tracker, “legacy BNPLs are finding increased pressures to find a path to profitability in today’s market. Many are forced to be more stringent in underwriting, in turn, leading to a significant decline in approval rates.”
That increased pressure to reach profitability has only been compounded by the high-profile devaluation of Klarna in July and the arrival of a string of banks and institutional lenders in the space.
See more: Klarna Faces Growing Pains as Losses Increase
In the U.K., major players in the banking space such as NatWest, Virgin Money, HSBC and Monzo have all launched BNPL products in the past year, combining their enhanced credit checks and deeper pockets with the interest-free installment plans preferred by BNPL borrowers.
Read more: Virgin Money Announces BNPL Credit Card
What Can Banks Bring to the Market?
Banks arriving on the BNPL scene raises an interesting prospect. To increase the approval rate for BNPL loans, lenders have the ability to unlock existing and approved credit lines, Sheth said.
“Consumers tend to shy away from using credit cards because of high interest rates, but at the same time, 45% of consumers pay off their credit card balances each month. Credit cards have a unique advantage over BNPL — there is no need for an application because the credit is already issued and available at any time,” he added.
By combining the higher availability of pre-issued credit with the interest-free approach of BNPL, banks could potentially increase their market share in the space and win customers from incumbent BNPL players.
Related: Monzo Jumps Into BNPL
But at this stage in the credit cycle, increasing lending to lower-income borrowers comes with risks.
As the Edinburgh researchers pointed out, “compared with non-BNPL users, BNPL users appear to be more financially active (i.e. have more transactions), spend more relative to their incomes, have higher overdrafts and a significant minority are heavily indebted.”
While a high level of financial activity is an attractive prospect for lenders, if the ratio of expenditure to income becomes too high, the risk of default increases, as it does among populations that are heavily indebted.
Wary of these risks, the U.K. government has moved to regulate the BNPL sector and in June announced plans to strengthen the affordability checks carried out by lenders. However, the new rules are unlikely to come into effect before mid-2023.
Learn more: UK BNPL Regulation Unlikely Before Mid-2023
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