The pandemic has transformed not only how we shop but how we pay. Over the past year, with repeated shutdowns of “non-essential” high street shops, many of us have switched to shopping online.
Millions of people have also turned from paying by debit or credit card to making online purchases by a fast-growing new method — buy now and pay later (BNPL).
But with about six companies, led by Klarna and Clearpay, now offering this service there is mounting concern about whether BNPL encourages people to buy things that they can’t afford.
The Financial Conduct Authority is due to report later this year on a review launched last September of the unsecured credit market, in which BNPL is a prime target.
While the FCA has already imposed some controls on BNPL practices, the sector remains largely unregulated, unlike, for example, the rival market in credit cards. Which?, the consumer rights organisation, is among those demanding tighter consumer protection rules.
Even leading BNPL companies call for stronger regulations. Alex Marsh, the UK lead for Klarna, says: “Regulation has not kept up with innovation and the changes in consumer behaviour. That’s why we fully support appropriate regulation which meaningfully improves consumer outcomes.”
And quite right too. The sector is now big enough to have a significant impact on British consumers, especially poorer people attracted to BNPL’s instalment plan payments. With the pandemic raging, many wealthier people have reduced debt and increased savings but less well-off households have increased borrowing.
While BNPL plans may not be credit in the strictest definition of the word, they often look like credit and smell like credit — and should therefore be regulated like credit.
BNPL companies offer clients the opportunity to pay for an online purchase after a set period, normally ranging from one to four months, usually in instalments. BNPL operators levy commission from retailers (around 3-6 per cent) and don’t charge buyers interest — unless payments are missed.
Success has come fast, and has been boosted by the pandemic. Launched only in 2014, Klarna saw its customers climb last year from 7m to 10m. Competitors have also grown rapidly.
Credit card companies, with 66m cards in issue, are feeling the heat: Barclaycard, the market leader, reporting a 7.1 per cent drop last year in card revenues.
But consumer protection groups are rightly worried customers may be taking on excess debt. They point out that retailers’ websites often highlight BNPL as a payment option at checkout, with some even offering discounts for using BNPL.
A survey of 2,000 Which? members published last month, said that 24 per cent of BNPL users spent more than they planned because BNPL was available at the checkout.
Jenny Ross, Which? money editor, says BNPL schemes “offer simplicity and convenience” but “make it far too easy for people to spend more than they were intending to. This could result in people falling into a spiral of debt.”
Regulators have taken notice. The Advertising Standards Authority last year banned certain Instagram posts promoting Klarna. It said the posts were made by “influencers” paid by Klarna and linked the deferred payment service to “lifting or boosting mood.”
The BNPL industry denies leading the vulnerable into debt. Klarna says its UK default rate is less than 1 per cent, lower than the average for credit cards.
James Jones, head of consumer affairs at Experian, the credit reference agency, takes a nuanced view. He says customers who use BNPL sensibly and make repayments on time shouldn’t harm their credit scores. But those who missed payments might affect their chances.
Credit card customers can choose how quickly they pay: they usually incur interest if they do not pay in full at the end of the first month but are free to spread repayments over many months. With BNPL the payment plan is set in advance and no interest or fees are charged, unless payments are missed.
For example, Clearpay users spread the cost of a purchase of at least £30 up to a maximum of £800 over four instalments. The first instalment, set at 25 per cent, is paid at the checkout; remaining payments are staggered across up to six weeks.
Customers who miss a payment are charged £6 the day after the due date and another £6 if no payment is made within seven days. Fees are capped at 25 per cent of the original price or £36, whichever is less. Clearpay says customers who get into difficulties can ask for a reschedule.
The company also monitors clients’ risks by starting with low initial purchase limits, the average first order being around £75. On-time payment is rewarded with increased limits to a maximum single purchase limit of £1,000.
This sounds reasonable. But are BNPL companies doing enough to protect clients? Credit card customers go through rigorous credit checks before getting a card. BNPL clients often don’t. Klarna says it uses a “soft search” in checking applications which does not involve providing information to credit reference agencies.
As companies are not regulated by the FCA for most BNPL company products, customers with problems cannot complain to the Financial Ombudsman Service or any other official body.
Consumer organisations are reporting a growth in complaints but customers have few remedies when things go wrong.
Resolver, the free complaints website, received 4,962 complaints about BNPL credit from April to September 2020, up 22 per cent on the previous six months. It received 6,673 complaints about credit cards in the same period. BNPL complaints often involve returned goods.
The FCA has taken a close interest in BNPL: in 2019 it stopped companies charging interest on that part of a debt that a defaulting customer had repaid. Operators were limited to levying payments only on what was still outstanding.
But that simply banned a particularly egregious practice. It is time for the authorities to build on that decision and regulate BNPL as a whole. The sector is now too important to overlook.
Lindsay Cook is the co-author of “Money Fight Club: Saving Money One Punch at a Time”, published by Harriman House. If you have a problem for the Money Mentor to look into, email firstname.lastname@example.org