The new rules of credit

Getting stuff and paying for it later has never been easier; a tap of your phone, a click on the Klarna button. Back when credit card marketeers relied on old-school messages such as 'interest-free for the first year' or 'pay nothing for 24 months,' we mostly knew where we stood. But do we have an appreciation of the psychological powers at play when it comes to the new breed of moneylender?

Like many Gen X folk from a working-class background, I grew up hearing terrifying stories of debt. It came with a side-serving of shame in our house, with 'never a borrower or a lender be' as its catchphrase. Nowadays my 20-something niece regularly says, 'I'll just Klarna it' when she sees something she wants. Paying in four instalments is now a verb, but other than that, has borrowing changed that much? The mechanics of how we get our hands on our desired item might have moved on, but surely, we are still talking about the age-old dilemma of satisfying a need or a craving and delaying paying the price?

Re-framing spending as 'saving'

'A lot has changed', says Dr Ruffin Relja, Senior Marketing Lecturer at the University of Gloucestershire and British Psychological Society member. Relja specialises in studying consumer relationships with products and brands. 'Buy now pay later (BNPL) services, along with their mobile apps and browser extensions, are intentionally designed to streamline the user experience, removing friction and maximising convenience for consumers and retailers. They're specifically crafted to attract young consumers, matching them with retailers on and off the BNPL platform, including through social media'.

But, Relja explains, it's not just the ease of access to credit that's a new move: 'The real game changer is the bold marketing communication used. The messaging is loud, vibrant, youthful, and fun. Everything traditional credit providers are not. BNPL providers employ various marketing strategies to make their services and platforms more engaging, fostering a sense of excitement and enjoyment. Aesthetic reference to popular culture is evident in their visual communication, as is their choice of language and incorporation of trending themes, which resonate with target audiences and enhance relatability.'

So, to grab our attention and present credit as a beneficial option, it would seem BNPL companies need to understand exactly how to pull our spending strings. Nicole Koenig-Lewis, a Professor of Marketing at Cardiff University, agrees. 'Emotions play a significant role in how consumers choose to spend money. We're not always rational in our payment decisions and to understand the psychology used in BNPL choices, we need to look at how both positive and negative emotions are evoked at different stages in this journey. Firstly, providers reframe "spending" as "saving" as part of their communication strategy. This aligns with our psychology around spending. Anticipating or making payments often triggers a "pain of payment" – the psychological discomfort we feel when parting with money, which is perceived as a loss. The intensity of this "pain" is subjective as it is measured against an individual's reference point.'

By BNPL companies downplaying that borrowing money is still taking out credit and shifting the focus to 'saving money' by using their services, do we consumers feel like we're somehow winning? 'Yes', says Relja, 'BNPL is providing consumers with flexibility in spending while keeping within their overall budget. And there are no fees or interest if we pay in time. By breaking the total cost into smaller instalments against the backdrop of the total price, these smaller payments seem cheaper, creating the illusion of saving. But it doesn't mean consumers' wallets are flush with extra cash, it just feels like it because their money drains at a trickle rather than in one big flood.'

Seduction and surveillance

Relja explains that to beat off the competition, BNPL companies need to be more in tune with our spending patterns. It's vital that they have a handle on what lures us towards that 'buy now' button. This is why they seek more information about us than ever before. 'Every time we use digital media, including BNPL apps, we leave behind a trace of our digital DNA,' says Relja. 'This enables brands to create a detailed avatar of us. The data includes personal information provided during registration and metadata collected before, during, and after our use of a brand's platform. It includes looking at how we navigate sites, how long we stay on them, what we linger over, what we "like", and our purchasing habits. Brands use this data to predict our future preferences, emotions, and behaviours.'

The thought of being tracked as I browse the John Lewis site late at night, moving an overpriced cleanser in and out of my basket because there's 20 per cent off, is something that has never occurred to me, yet I know I'll still lazily 'accept all' when I am faced with an annoying cookie pop up. 'Acceptance of cookies is an important action to be aware of,' says Relja. 'Many users willingly or unwillingly relinquish personal data, and, as a result, control, to data-driven companies.'

But, according to Relja, it's not just the purchasing public who is negotiating this changing landscape. 'Retailers are also being left in the dark too,' he explains, 'BNPL providers insert themselves between the relationships stores have forged with their customers, creating a greater psychological distance and weakening prior bonds. They achieve this not only by facilitating transactions at the retailer's point of sale but also by redirecting services to their own apps. The latter have evolved into enclosed consumption platforms where consumers can browse brands and products, make purchases, and manage their orders and budgets. As a result, the connection between BNPL providers and their users grows stronger. Through algorithmic marketing, consumers can be presented with curated retail offers and personalised sales promotions. This knowledge enables BNPL providers to understand consumers better and tailor marketing strategies to optimise profits.'

Making credit one-clickable

But surely, even if we know all this, we'll always go for the easy option, and BNPL helps us to check out fast and offers us more money than we have. 'Accessing money is as easy as a single click', says Relja. 'BNPL purchases are typically unregulated in the UK because they must be repaid in less than 12 months and don't involve "hard" credit checks, and won't impact your credit score. Additionally, repayments are typically interest and fee-free if made on time; however, late payments can incur additional costs and negatively impact consumers' credit records. These features collectively lower the barriers to accessing credit, making BNPL a highly appealing payment option.

We could go as far as saying that BNPL providers not only offer easy and smooth access to credit, but they also make it a fun shopping experience, seamlessly connecting consumers, brands and platforms. For example, Clearpay uses the claim "Unlock your favourite brands" to nudge consumer behaviour. This language is reminiscent of gamification techniques, suggesting a sense of achievement and reward that encourages consumers to engage with brands as if they are completing levels in a game.'

Lending for anything and everything

Although the Financial Conduct Authority (FCA), which governs the UK financial market, says regulated credit (lasting more than 12 months) is typically used for big-ticket purchases like furniture, and unregulated BNPL credit (usually repaid within three months) is used for smaller items, such as clothing, Relja says this is an overly simplified view. 'Emerging research, including our own, shows that the reality is far more complex and nuanced than it first appears. Some consumers use BNPL for personal items like clothes, shoes and accessories and cite the reason they use this option is that it allows them to align repayment dates with paydays or defer payments until they've tried the products at home; others rely on it for food and turn to it as a last resort to make ends meet.'

But who's to say that having this option is a bad thing? Surely having more choices when it comes to managing our cash flow more strategically or even help us to feed our families when times are tough can at times be a vital lifeline? Dr Anita L. Zhao, an Associate Professor in Marketing at Swansea University, who leads a research project funded by the British Academy to explore the impact of BNPL on financial well-being, is concerned about the potential negative effects; 'BNPL usage can significantly impact individuals' financial and overall well-being, especially for those who place high importance on material possessions', she argues. 'And, as is so often the case, it is the young and/or the financially vulnerable who will be hit hardest.'

Relja agrees. 'Research suggests that attributes like impulsivity and materialism can drive increased BNPL usage, raising concerns that individuals with lower financial self-control and self-efficacy may be more financially vulnerable. For many young consumers and other potentially vulnerable individuals, these services often represent their only access to funds, either by choice (e.g. disinterest in traditional payment methods such as credit cards) or by "choicelessness" (e.g. poor credit histories). In 2023, 63 per cent more people sought help from Citizens Advice for BNPL debt. BNPL credit still lacks the consumer protections regulated credit provides, so, it could be argued that BNPL has the potential to trigger or aggravate indebtedness'.

Reshaping our reactions to debt

At least my generation and the boomers before me had a bigger chance of saving for a mortgage, or an opportunity to rent in a big city. Why should Gen Y and Z care about BNPL debt when a debt-free future doesn't feel like an option? Relja tells me that recent Australian BNPL research coined the term 'indebtpending', where indebted young adults struggle to imagine a secure future. 'While past studies have examined young people's attitudes towards the future in terms of politics, the environment, and their personal backgrounds, this research highlights how debt constrains their ability to progress into full adulthood. This state of "stuck-ness" leaves them without the social hope often promised in neoliberal societies. The idea of "cruel optimism" emerges, where debt is framed as a teachable moment, preparing them for their next challenge. However, this belief is often an illusion, masking more profound inequalities and the relentless cycle of managing debt.'

Knowledge is power

So far, so depressing. But Relja and his team of researchers argue that we can empower and educate ourselves by asking the right questions when it comes to credit. 'Curiosity is valuable when exploring new products like BNPL. Consumers can make more informed financial decisions by taking time to understand each party's interests – their own, the retailers and the BNPL provider. It's essential we educate ourselves on core personal finance concepts such as budgeting, saving, investing, and debt management to achieve long-term stability. Additionally, developing a solid sense for numbers is crucial to understanding instalment plans and comparing offers, including fees and interest, helping us choose the best option for our personal situation.'

A reframing of BNPL is also essential for us to avoid potential pitfalls argues Professor Phillipa Ward, Professor of Marketing at the University of Gloucestershire, 'The key consideration for the future of BNPL is not simply thinking about it as a financial service that needs regulation, but understanding it's a consumption platform that thrives on personal data. It's essentially a form of surveillance capitalism, and that's what really needs policy intervention to prevent consumer exploitation.'

Relja concludes, 'On the one hand, BNPL can grant consumers access to new funds or extend budgets and assist in their fiscal management. However, the underlying technology enabling these benefits can also restrict freedom, limit choice, and erode self-determination. While initial market data predicts exponential increases in BNPL spending, it will be interesting to see how regulators and other market players influence the evolution of the BNPL ecosystem.'

It would seem BNPL options are set to nudge their way further into our everyday lives. As our tendency to chase the feel-good but often temporary boost of buying stuff is unlikely to subside, perhaps placing real, significant value on our own personal data and who we offer it to, is where our power lies.