Miya Tailor & Aron Bhalla, Analysts at Warwick Commercial Awareness Society (WCAS)
FinTech is the portmanteau for finance and technology, describing any technology which augments financial services. This includes software, algorithms, applications for computers, as well as hardware such as virtual reality. The industry is incredibly large and is expected to grow in the future as firms start to increasingly rely on FinTech processes. Despite it becoming an official word in the dictionary in 2018, FinTech innovation dates to the creation of ATM’s in 1860. FinTech became popular during the 1990s with the internet first beginning to develop, as well as in the following decade with many financial processes having already been digitised.
The Financial Crisis of 2008 led to a shift in the consumer mindset as people lost trust in traditional banking systems, therefore placing a greater emphasis on security. The change in opinion and rise of technology, supported by the development of cloud computing, allowed FinTech to flourish, making it possible for new financial solutions to develop. Today, FinTech helps firms accelerate processes that may have taken days or weeks in the past. This includes common tasks, such as requesting a credit score report. The increasing reliance on automation, as opposed to human inputs, has allowed for this increase in speed and convenience to take place. For example, when casual investors want to go over the details of their portfolios with financial experts, they do not need to meet in person. Instead, they are able to view their options online, or perhaps get help from an online chatbox. It is undoubtedly true that FinTech is a major part of the modern economy, becoming ingrained and integral to the functioning of society.
Growing Popularity of Buy Now Pay Later and the impact of the pandemic
A form of FinTech innovation are ‘Buy Now Pay Later’ (BNPL) services, which allow consumers to take advantage of delayed payment options. The industry is currently worth $97 billion, and with the rise of online shopping, as well as the impacts of the coronavirus pandemic, it is only expected to expand further. The growing popularity of BNPL can be attributed to several factors, such as the lack of reliance on consumer credit history and making the service more accessible to customers who would not normally have access to product finance options. Furthermore, it is more convenient for customers, providing them with a way to finance the purchase of expensive items even if they do not have the funds currently available. Major players in this industry include Klarna, Afterpay and Affirm.
Following on from the pandemic, the sector has seen its growth accelerate. Whilst household income and spending decreased during 2020, consumers using BNPL services increased by 32%. For example, over half of millennial and generation Z shoppers have reported using the service during the pandemic, demonstrating its popularity with younger customers. Furthermore, the pandemic has meant that popular BNPL firms, such as Afterpay and Affirm, are growing at an annual rate of 39%. Indeed, they are expected to double their market share by 2023 suggesting that even after the worst of the pandemic is over, the popularity of BNPL will continue to rise.
Activity in the BNPL sector
Approximately 10.1 million people in the UK used the BNPL sector in 2020, a staggeringly high number representing a 70-80% growth rate from the previous year. As discussed, the pandemic (which has reduced disposable income) has pushed consumers towards innovative ways of funding high-value purchases. A model already widespread in funding the purchase of particularly expensive products, such as cars and white goods, has now been extended to a broader range of consumer products. These include electrical devices, clothing, and cosmetic accessories. By spreading the cost over a longer period, they extend the availability of these goods to a wider range of consumers, helping firms grow the size of their potential market, as well as helping customers.
Indeed, customers benefit in several ways. Firstly, it allows consumers with less disposable incomes to enjoy a higher material living standard. In addition, it can also save customers money. For example, in 2020, BNPL users in the UK saved £103million in credit card interest costs, as they used BNPL schemes to fund purchases as opposed to credit cards.
Concerns regarding BNPL
Despite the apparent advantages of BNPL schemes, a number of issues remain present in the sector. Consequently, the industry should be prepared for imminent government regulation on matters including predatory lending, consumer debt and data management. Specifically, the UK Financial Conduct Authority has expressed concerns regarding the adequacy of the current credit referencing, focusing on the ability to share credit information between BNPL companies and other lenders. Due to the number of firms involved in this sector, totaling some 20,000, and the relatively small size of many of them, there is not an integrated credit checking and data-sharing system. As a result, it is possible for consumers to build up large quantities of debt through BNPL schemes, without this appearing on their credit score, undermining the ability of banks and financial institutions to effectively evaluate individuals when making lending decisions.
To conclude, the BNPL is a large and growing industry that has benefited from the structural changes in the economy resulting from the pandemic. It provides undoubted benefit to consumers by increasing the range of goods available to low-income customers, while also saving people money by eliminating the need for excessive credit card charges. Nonetheless, issues do remain. Its handling of customer data, and its potential to undermine the effectiveness of lending checks will lead to increased pressure from government regulators. Moreover, its contribution to the already substantial level of household debt may lead to political pressure for clampdowns on the sector. Despite these issues, the sector does remain strong, with robust and impressive annual growth rates and a growing market share. There is every indication that the BNPL sector is here to stay.