The truth behind buy-now-pay-later schemes

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. 

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.”