The Truth Behind Buy Now Pay Later Programs
The Buy Now and Pay Later (BNPL) industry has exploded in popularity in recent years. While the concept of providing short-term credit is far from new, a multitude of entrants to the sector, including Klarna, ClearPay and Laybuy, have re-energized the market with their innovative products. Large retailers ranging from M&S to H&M now offer their customers a BNPL option.
BNPL’s appeal is clear: it allows customers to get their merchandise immediately but part with their money more slowly, paying either interest-free monthly installments or a lump sum.
The success of these new offerings is such that Klarna has become Europe’s largest fintech unicorn, valued at £ 33 billion and with over 90 million customers worldwide.
“Basically, BNPL programs are attractive because they can help consumers manage their cash flow,” says Mark Turner, managing director of financial services regulatory and regulatory consultancy Kroll. “Instead of having to wait a week or two, they can have the items they want now and hand over the money after payday.”
Although they work the same way as credit cards, BNPL services normally require faster debt clearance and with fewer payments, but often without the risk of punitive fees and interest charges. Not surprisingly, their popularity has skyrocketed during the pandemic, with the number of transactions tripling in 2020. BNPL sales are expected to account for 10% of all e-commerce activity by 2024, according to WorldPay.
While it may be easy to imagine that BNPL is the preserve of young consumers who live paycheck to paycheck, research paints a different picture. While 42% of millennials have used a BNPL service more than once in the past five years, the equivalent figure for Gen X consumers, 34%, is not too far off, according to a study by the firm. American council Kearney.
In addition, the research of Who? The magazine found that people in better-off households and those with young dependents are more likely than average to use BNPL’s services.
As BNPL has widened its appeal, it has also drawn criticism. Some observers have long feared that these products encourage overspending and could tarnish users’ credit ratings if payments are missed.
“As with any credit product, the main risks are affordability,” says Turner. “For anyone who is in control of their finances, there is nothing wrong with using them. But some customers may already be heavily in debt. Adding BNPL bonds to that debt could push these people to the brink. “
Charities and consumer advocates have questioned the quality of credit checks performed by the BNPL industry and are calling for better protections for users. A service provider will currently perform a smooth check on an applicant, which means that any other potential lender will not be able to see that the person has made that request. This verification process tends to focus on the risks to the provider, rather than whether the requester can afford to use the service.
Although BNPL transactions tend to be relatively small, the lack of cross-references means that someone can make multiple purchases from different vendors making it easy for this consumer to accumulate debt of around £ 1,000 quite easily. , what credit reference agencies and traditional lenders have earned. I do not know.
Citizens Advice has warned that up to 40% of people who have used BNPL in the past year have struggled to honor payments. According to his research, there is also a lack of awareness among consumers as to how failure to pay could affect their credit rating, with BNPL providers reserving the right to pass information to referral agencies if necessary.
For the association’s interim CEO, Alistair Cromwell, this makes BNPL an inherently risky proposition. This is especially the case for vulnerable consumers – for example, people with mental health issues – who may not fully understand what they are agreeing to.
“It can be like quicksand – it’s easy to slip in unintentionally and much harder to get out of it,” he said in April when Citizens Advice released its findings. “It shouldn’t be possible for people to take out credit without realizing it. The fact that this happens so often indicates that a drastic overhaul is needed. “
Whether that’s drastic enough for Cromwell or not, a redesign is underway. In February, the Treasury announced its intention to have the Financial Conduct Authority start regulating the BNPL market, noting that “legislation will be brought forward as soon as parliamentary time permits.”
Under the proposed new regime, providers will need to conduct affordability checks of applicants before lending to them and ensure that customers are treated fairly, especially those who have difficulty paying. Users with complaints can address them to the Financial Ombudsman Service.
The announcement was generally well received, although some experts believe the government should have recognized BNPL’s well-publicized risks sooner and acted faster to protect consumers.
One of them is Andrew Hagger, founder and director of personal finance website MoneyComms. He believes that once the legislation is in force, “this should mean that more applications will be refused due to lack of affordability, aligning BNPL with other forms of personal consumer credit.”
But he adds, “It will come too late for some users, who have already racked up huge debts with several retailers and are now struggling to keep up with their large monthly repayments. Those who have defaulted will have damaged their credit reports in the process – something that could take years to repair. “