Shining light on ‘shadow credit’ – what is Buy-Now-Pay-Later and who uses it? – Bank Underground

Gerry Gunner and James Waddell

Buy-Now-Pay-Later (BNPL) is a relatively new form of consumer credit that you might have noticed as a payment option when shopping online or in person. However, there is little analysis in the public domain about who is using BNPL credit in the UK and its contribution to total household debt. We have used the Bank’s NMG Consulting survey to reveal that BNPL borrowers are typically younger adults and renters, and are more likely to report signs of financial distress.

What is BNPL?

Defining exactly what BNPL is can be tricky. The only thing all BNPL products have in common is they allow users to defer payment across multiple instalments when buying goods or services.

Many BNPL products are exempt from regulation because they do not charge interest on repayments. Revenue is generated by charging retailers a fee for facilitating the transaction. Some lenders supplement this by charging borrowers fees for late payments. Typically these products are provided by newer fintech firms, for whom BNPL makes up most or all of their lending.

Some other BNPL products are regulated and charge interest on repayments. These products are typically provided by more established lenders who have banking licences. For these lenders, BNPL products are relatively new and make up a very small part of their lending business.

Who uses BNPL?

Given BNPL is relatively new and much of the market is unregulated, there is little publicly available data on its use. In 2021, the FCA released the Woolard Review which covered unregulated BNPL products. It found that the use of BNPL products nearly quadrupled in 2020 to transactions worth £2.7 billion. Data collected from some BNPL providers revealed 25% of users are 18–24 and 50% are aged 25–36.

To shed further light on who uses BNPL we analysed the Bank’s NMG household survey, which uses weights to be nationally representative. In the March 2023 wave of the survey we asked respondents if anyone in their household owed any money, and if so how much, on BNPL products defined as:  

Buy now pay later agreements; where payment is deferred or split into instalments, often with no interest (eg Klarna, Clearpay, Monzo Flex, Instalments by Barclays etc).

The NMG Survey is run at the household level, whereas the FCA’s data was collected at the user level. This means our results will not be directly comparable to the FCA’s.

For the purposes of this article we define ‘users’ as households reporting BNPL use. We have filtered respondents to only include those who are sole or joint financial decision makers in their household.

On aggregate, the NMG data suggests that 11% of households, or 3.1 million households across the UK reported owing money on BNPL. Among users the mean balance was £866, implying an outstanding aggregate BNPL balance of around £2.7 billion. The distribution of balances is skewed. Lots of BNPL users report balances of a few hundred pounds or less, with a small number reporting much larger balances. The median balance of users is £300 and the 90th percentile is £2,000.

In addition to aggregate statistics, the NMG data allows us to gain insight into how BNPL use varies across different households. There are four characteristics we analyse: age, income, housing tenure and self-reported financial difficulty.

Chart 1a: Share of households using consumer credit products by age group

Chart 1b: Mean household BNPL balance by age group

Age

In Chart 1a, we see BNPL use is most common among 25–34 year olds. We have included credit and store cards as a reference point. BNPL has overtaken store cards for all age groups, but remains less popular than credit cards. There are a number of reasons why BNPL use could be higher for younger people; BNPL is frequently integrated into online shopping, which is more popular with younger people, and older people already have greater access to credit through credit cards. 

In Chart 1b, we see that 35–44 year olds report the highest BNPL balances. Around 37% of households who owe £2,000 or more on BNPL are aged 25–34, the most of any age group.  

Chart 2a: Share of households using BNPL by income decile

Chart 2b: Mean household BNPL balance by income decile

Income

We expect BNPL to be more popular with lower income households. Unregulated BNPL providers do not have to carry out affordability checks on borrowers (although they may choose to do so), so poorer households might turn to BNPL if they are excluded from other forms of regulated credit.

In Chart 2a there is no clear relationship between the BNPL usage rate and household income. Households with incomes between 45,000–54,000 are the most likely to report using BNPL. BNPL balances increase with household income (Chart 2b). The top two income deciles account for about 38% of households who owe £2,000 or more. There are a small number of low income households with high BNPL balances, although the average BNPL balance for this group is about the same as for all households.

Chart 3a: Share of households using BNPL by tenure

Chart 3b: Mean household BNPL balance by tenure

Housing tenure

It is important to understand the relationship between tenure and consumer credit products as mortgage debt and rent payments might be prioritised over payments for consumer credit. These housing obligations could make mortgagors and renters more likely to miss repayments or default on consumer credit.

In Chart 3a we see renters are much more likely to be BNPL users than other groups, and outright owners are the least likely. This is partially explained by the relationship between housing tenure and age, as younger people are more likely to be renters. However, we can control for this relationship by looking at use by tenure across younger households only. After doing so we see that renters are still more likely than other groups to be BNPL users. In Chart 3b we see that renters report the lowest balances, while outright owners report the highest balances. This is partially explained by the relationship between housing tenure and income, as renters are much less likely to have very high incomes than mortgagors or outright owners. Mortgagors account for around 38% of households owing £2,000 or more and renters 34%.

Financial difficulty

Younger people and renters are more likely to be BNPL users, and these groups tend to have less resilient finances. The data confirms that BNPL users are more likely to display signs of financial vulnerability. 68% of BNPL borrowers are concerned about their level of borrowing, compared to 45% of other borrowers. BNPL users are more likely to report falling behind on any of their unsecured debt by two months or more over the past year. 21% of BNPL users report having been in arrears, compared to 6% of other borrowers.

Conclusions

Data on BNPL is limited, partly due to its exemption from regulation. Household survey data reveals financially vulnerable groups such as renters and those aged 18–34 are more likely to be BNPL users. They are also significantly more likely to report signs of financial distress. 

On the other hand, the poorest households are no more likely than average to be BNPL users. Currently BNPL use is not as widespread as other forms of consumer credit and average balances are small. Regulated lenders’ exposures to losses from BNPL lending are limited.

Gerry Gunner and James Waddell work in the Bank’s Macrofinancial Risk Division.

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