Buy Now, Pay Later Boom Fuels Worries About Consumer Debt As Transactions Soar

This article is the last part of the FT’s Financial Education and Inclusion Campaign

In the era of mobile payments, Swedish ‘buy now, pay later’ group Klarna’s decision to launch its first physical card in the UK last month seemed somewhat outdated.

Pastel pink and black cards allow customers to make purchases, but delay payment for 30 days.

It is the latest development in the buy it now, pay later (BNPL) phenomenon that has swept the UK, presenting itself as a healthier alternative to other types of unsecured loans, but fueling debt problems as the cost of living skyrockets.

Klarna, which has 90 million customers in 17 countries and was valued at $46 billion in an investment round backed by Japan’s SoftBank last year, has led the UK boom in recent years.

But the field became more and more crowded. Digital banks Monzo and Revolut are testing BNPL’s functionality, while challenger bank Virgin Money launched its payout service late last year. In December, Barclays and Amazon announced the release of a BNPL feature called Payouts for purchases of £100 or more.

The Financial Conduct Authority estimated that £2.7bn was spent on BNPL transactions in 2020. Researchers said the market grew to more than double – £5.7bn – the year last.

BNPL allows users to delay or split the cost of purchases without paying interest unless they miss payments; some providers have even waived late payments or interest charges.

Virtually all major clothing and footwear retailers now offer BNPL as a payment option on their websites. Klarna’s partners include, for example, JD Sports, Nike, H&M, Hotel Chocolat and Ray-Ban. Service is also common in higher-priced sectors such as housewares and electronics.

Retailers pay a commission to the BNPL provider just as they would an interchange fee to a credit card company. Some – Next and Very, for example – have launched copycat products, such as Next3Step.

But the rapid growth and easy access to this source of finance has raised concerns that it could encourage young and vulnerable consumers to spend more than they can afford, especially due to lack of credit checks.

It comes as a sharp rise in the cost of living begins to weigh on household incomes, with UK consumers already facing the highest inflation in 30 years and energy costs set to rise more steeply.

“Our research shows that many users don’t realize they’re going into debt or considering the possibility of missing payments,” warned Rocio Concha, director of policy and advocacy at the rights group. consumers Which?.

In December, the UK’s Advertising Standards Authority banned several of Klarna’s adverts which “irresponsibly encouraged the use of credit to improve people’s moods”, and introduced guidelines requiring all providers to clearly state that BNPL is a type of debt.

Klarna said it has actively and significantly changed its influencer and advertising policy and invested in KlarnaSense, a product designed to encourage responsible spending.

Bar chart of % of respondents showing that a third of millennials who have used BNPL have been charged late payment fees

Other regulators are now scrutinizing the sector. The Treasury launched a BNPL market consultation in October, which will define the scope of an FCA consultation this year.

Elsewhere, regulators have also hinted at a tougher stance. In December, the US Consumer Financial Protection Bureau ordered Klarna, US-based Affirm, Australian groups Afterpay and Zip and PayPal to provide information about their business practices, citing concerns such as debt accumulation and regulatory arbitrage.

BNPL providers say their service is less predatory than credit cards, which charge an average interest rate of more than 20% a year, according to the Bank of England.

In October, Klarna made changes to its UK services ahead of an expected crackdown from regulators.

The company said it would introduce new wording to make it “absolutely clear” to customers that they were being offered credit, with penalties for missed payments. It also added a “pay now” option and stricter credit checks.

The company said the vast majority of its transactions are made on debit cards rather than credit cards.

In its submission to the Treasury, Klarna described BNPL as an “inherently less risky credit option”, while Alex Marsh, head of Klarna UK, said the consultation was “an important step forward in the regulation of BNPL, which we have been asking for for a long time”. .

UK-based BNPL Zilch said: “Unlike credit card models which monetize late fees and interest, our model only works if customers are able to repay on time.”

Anthony Stephen, managing director of Barclays Partner Finance, which launched a partnership with Amazon last year that allows the retailer’s UK customers to spread payments of £100 over three to 48 months – but charges interest – said: “ We believe that all consumer loans should be regulated and subject to the same rules.

Yet charities and financial advisers are concerned about the risks to users.

The Center for Financial Capability, a charity, found that nearly a quarter of UK adults who had used BNPL services had not paid on time, with the figure rising to 35% for people aged 18-34. year.

“These figures reveal the truly shocking nature of this market which exposes people who are already potentially vulnerable to debt problems,” said Carol Knight, trustee of the charity.

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