The truth behind buy-now-pay-later schemes

Buy-now-pay-later providers have thrived by offering consumers accessible, simple and (in theory) free credit. But their practices may prove a little too free and easy for the financial watchdog’s tastes


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The buy-now-pay-later (BNPL) sector has exploded in popularity in recent years. While the concept of offering short-term credit is far from new, a host of entrants to the sector, including Klarna, ClearPay and Laybuy, have reinvigorated the market with their innovative products. Big retailers ranging from M&S to H&M are now offering customers a BNPL option. 

The appeal of BNPL is clear: it enables customers to get their goods immediately but part with their money more slowly, paying either interest-free monthly instalments or a lump sum. 

Such is the success of these new offerings that Klarna has become Europe’s biggest fintech unicorn, valued at £33bn and boasting more than 90 million customers worldwide.

“Fundamentally, BNPL schemes are appealing because they can help consumers manage their cash flow,” says Mark Turner, MD of financial services compliance and regulation at risk 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 pay day.”

While they operate in a similar way to credit cards, BNPL services normally require debts to be cleared more quickly and with fewer instalments, but often without the risk of punitive fees and interest charges. Perhaps unsurprisingly, their popularity soared during the pandemic, with the number of transactions tripling in 2020. BNPL sales are on course to account for 10% of all ecommerce activity by 2024, according to WorldPay. 

While it may be easy to imagine that BNPL is the preserve of younger consumers who live from pay cheque to pay cheque, 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%, isn’t too far behind, a study by US management consultancy Kearney has found. 

For anyone who is in control of their finances, there’s nothing wrong with using BNPL services

Moreover, research by Which? magazine has found that people in more affluent households and those with young dependants are more likely than average to use BNPL services. 

As BNPL has broadened its appeal, it has also attracted criticism. Some observers have long voiced concerns that these products encourage overspending and could tarnish users’ credit ratings if payments are missed. 

“As with any credit product, the main risks relate to affordability,” Turner says. “For anyone who is in control of their finances, there’s nothing wrong with using them. But some customers may already be heavily indebted. Adding BNPL obligations to that debt could push these people over the edge.”

Debt charities and consumer campaigners have questioned the quality of the credit checks made by the BNPL sector and are calling for better protections for users. A service provider will currently conduct a so-called soft check on an applicant, meaning that any other potential lender will not be able to see that the individual has made that application. This verification process tends to focus on the risks to the provider, rather than on whether the applicant can afford to use the service. 

Although BNPL transactions tend to be relatively small, the lack of cross-referencing means that someone could make several purchases with different providers, making it fairly easy for that consumer to accrue a debt of about £1,000, which credit reference agencies and mainstream lenders won’t know about. 

Citizens Advice has warned that as many as 40% of people who have used BNPL in the past year have struggled to honour the payments. According to its research, there is also a lack of awareness among consumers as to how missing a payment could affect their credit rating, with BNPL providers reserving the right to pass information on to the reference agencies if required. 

For the charity’s acting CEO, Alistair Cromwell, this makes BNPL an inherently risky proposition. This is especially the case for vulnerable consumers – for instance, people with mental health problems – who may not fully grasp what they’re agreeing to. 

“It can be like quicksand – easy to unwittingly slip into and much more difficult to get out of,” he said in April when Citizens Advice published its findings. “It shouldn’t be possible for people to sign up for credit without realising. The fact that this is happening so often signals that a drastic overhaul is needed.”

Whether it’s drastic enough for Cromwell or not, an overhaul is on the way. In February, the Treasury announced plans for the Financial Conduct Authority to start regulating the BNPL market, noting that “legislation will be brought forward as soon as parliamentary time allows”. 

Under the proposed new regime, providers will need to conduct affordability checks on applicants before lending to them and ensure that customers are treated fairly, particularly those who are struggling with payments. Users with complaints will be able to take them to the Financial Ombudsman Service.

The announcement was generally well received, although some experts think that the government should have acknowledged the well-publicised risks of BNPL sooner and acted more quickly 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, “it should mean that more applications will be declined based on lack of affordability, bringing BNPL in line with other forms of personal consumer credit”. 

But he adds: “This will come too late for some users, who have already racked up huge debts across multiple retailers and are now struggling to meet their sizeable monthly repayments. Those that have defaulted will have damaged their credit record in the process – something that could take years to repair.”