Should retail brands be concerned about the growing ‘buy now, pay later’ debt accumulated by Australian consumers? Dan Bradley poses the question.

Authenticity. Purpose. We are told today’s customers seek brands with values aligned to theirs. That they will seek out and pay a premium for products driven by purpose and social benefit. Accordingly, brands spend significant time and money positioning themselves to create positive associations with consumers, whether that’s through communicating their purpose or engaging in worthy environmental or social partnerships.

And yet, consumerism isn’t slowing down. Fast fashion isn’t slowing down. Lockdowns have simply driven purchases online and accelerated digital transactions. In many ways, the switch to easy online retailing, with its lower operating models, has driven the retailing rebound. Instant gratification is never more than a few clicks away.

The excitement and anticipation of buying that little gift for ourselves is reinforced and fuelled by notifications of carefully wrapped packages being dispatched from far-flung warehouses and wafting effortlessly to our door.

Sitting behind this and driving a large part of the retail bounce-back is ‘buy now, pay later’ (BNPL). And it’s a powerful driver with ASX-listed BNPL providers processing around $10 billion worth of purchases in Australia and New Zealand, during 2019/20, according to the RBA.

Without credit checks, any Australian consumer with a debit card can instantly access thousands of dollars of, well, not ‘credit’ or ‘finance’, because that would be regulated, but ‘get-now, pay-later’, shall we say. Which is largely unregulated, despite the ‘bad debt’ being held by the listed BNPL players reaching a combined $267.8m.

Confusing language aside – how can you hold a ‘debt’ yet not be extending ‘credit’, I wonder? – one thing is clear, BNPL has become a powerful force in the retail ecosystem. The number of BNPL transactions leapt from $16.8 million in the 2017-18 financial year to $32 million in 2018-19 representing an increase of 90 per cent. That was even before lockdowns and Covid.

Australian using these systems tend to be lower earners with an average or relatively low wage. Almost 11.7 per cent of them earn between $40,000 and $49,999.

The BNPL offer is positioned as ‘almost free’ with retailers absorbing the fees. Until a payment is missed. Then late fees are charged.

ASIC’s consumer research indicates 21 per cent of BNPL users missed a payment in the last 12 months. Nearly half were between 18 and 29. And BNPL users were found to be more likely than the general population to experience financial stress over the last 12 months – 21 per cent versus 12 per cent.

Late fees earned the Australian BNPL industry $43m in 2019 alone, according to ASIC research. That figure is likely to have grown given Australia’s two largest BNPL providers, Afterpay and Zip, are listed as having almost 6 million active accounts between them, around 24 per cent of the Australian population.

The BNPL industry – exempt from some of the regulation applied to other forms of credit such as the National Credit Code – hasn’t escaped scrutiny about how vulnerable consumers could be rapidly accumulating debt and end up worse off financially. For example, missed BNPL payments have the potential to affect an individual’s credit rating and make it harder for them to get access to home loans and other types of credit.

While these services have been described as ‘innovations’ and ‘postmodern debt’ that are an individual’s problem and responsibility, the sheer scale of the debt being rapidly accumulated is boggling. Compared to January 2020, spending on BNPL has increased by 106 per cent. And much of that growth is credited to younger customers — among Millennials and Gen Z, BNPL use is up 75 per cent and 116 per cent, respectively.

Many retailers are relying heavily on BNPL which is leading to extreme stock market valuations for BNPL providers but as they aren’t making profits, a number of advisors are drawing analogies with the dot com bubble.

This is shaping up to become a ‘whole of sector’ issue – and a serious brand challenge.

So, what can retailers do?

Those that take a longer brand-building view should work to actively design trust into their relationships to build long-term loyalty and advocacy.

If BNPL becomes heavily regulated, share prices drop and the dream is over, what then?

Retailers must bake resilience into their systems if they are to be purpose-driven, open and authentic. They might consider extending their relationship with the customer, investing more energy in getting to know them, their needs and habits – starting with the quantitative data they have on them then building higher fidelity profiles through qualitative methods, rather than let all the valuable data sit with the finance companies.

A move away from a transactional relationship to a more intentional, authentic and curated one can then be built around shared values or world view, to build brand disposition, increase and drive retention and loyalty.

Brands in the financial space are already doing exactly that. Recently we worked with a big four bank to reimagine the design of its terms and conditions for credit cards in ways that increased financial literacy, built trust and reduced complaints. It aligned with the brand’s values and transformed the experience. More than that, it reframed the relationship to one of mutuality and will, over time, reduce churn, lower cost-per-acquisition, save money by reducing complaints and deliver growth as a clearly differentiated offer. We know all this because we’ve been testing it with customers.

Rather than let customers walk into an issue and reaping short term gain but long-term pain, retailers have an opportunity to act now by co-designing a better way forward that doesn’t leave consumers, and retail brands, vulnerable.

This piece first appeared in Inside Retail.

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