BNPL firms heading for demise amidst soaring interest rates and rise in missed payments

Debt culture has always been ingrained in society, with customers being offered a loan as soon as a bank account is opened – however, the rise of Buy Now, Pay Later (BNPL) schemes and the instant gratification that comes with this took Britain’s relationship with debt to a new level. Deliveroo users can now even use Klarna to pay for their takeaway in instalments, highlighting the extent of the problem at a time when many are struggling to make ends meet. Alarming figures from Citizen’s Advice have revealed that over two-in-five BNPL users borrowed money simply to make repayments, and now, Mat Megens, finance expert and CEO/Founder of the nation’s most-awarded budgeting app, HyperJar, explains why the increasing number of defaults, alongside the growing difficulty for credit firms to borrow money, will cause the ultimate demise of the BNPL industry.

Soaring interest rates have meant that it is becoming increasingly costly for BNPL firms to borrow money – putting significant strain on the macro business model of the sector. Following the explosive growth of firms such as Klarna, Afterpay and Zip in the past decade, none of these firms are currently profitable, and this shows no signs of changing amidst the current economic climate. Recently, news swirled around the staggering 85% drop in valuation of BNPL giant, Klarna – and given that interest rates are projected to top 6% by next year, Megens explains that this could act as the final blow in the downfall of BNPL firms.

The potential fall of BNPL comes as personal debt across the UK saw a £62.5bn increase from last year, totalling £1.8tn in June. Alongside this, the number of households in personal debt is projected to increase to almost 4 million by the end of 2022, according to Arrow Global. As consumer prices continue to steadily rise, it is becoming more challenging for Brits to manage their finances effectively – the same research from Citizen’s Advice reveals that 51% of 18-34 year olds are most likely to borrow money to pay off BNPL debt, compared to 39% of 35-54 year olds and 24% for those over 55. The main types of borrowing include overdrafts, borrowing from family and friends, and loans – with credit cards being the most popular way of paying back debt.

With families set to fork out an extra £1,800 a year on living costs by next year, HyperJar, is the pioneer of the Save Now, Buy Later (SNBL) movement, and offers an alternative to BNPL schemes. Users can put their money into digital jam jars and dedicate their savings towards HyperJar’s retail partners – ranging from household brands to high-street retailers. In return, they’re rewarded with a staggering 4.8% annual growth rate. For context, the UK’s average AGR is 2.5%, according to government reports. As a result, customers can save up for their purchases, and be rewarded for doing so.

Mat Megens, CEO and founder of HyperJar explains why the glory days of BNPL are over: “‘Quick hit’ spending is a cause of debt for millions of people – especially for younger generations. It’s the financial hangover after that instant dopamine hit from spending. That obligation to pay for things after you’ve got them has a negative emotional effect, whether we know it or not, because we now have a debt which prevents is from doing other things in life.

“Recent research from Citizen’s Advice shows that a staggering 42% of people are actually borrowing money just to be able to meet their repayments for BNPL schemes, and it won’t be long before defaults drastically increase. Rising interest rates are also putting further pressure on these firms who rely on being able to borrow money cheaply in order for the business model to work. We’re already seeing the material effects of this with the huge slashing of valuations for businesses such as Klarna. I expect we will see more of a focus on the Save Now, Buy Later ethos that we’re championing at HyperJar.”