The Cost-of-Living Crisis is Fuelling Buy Now Pay Later but Where is the Promised Regulation and Consumer Protection?

By Professor Sally Dibb and Professor Lyndon Simkin, Centre for Business in Society

Buy Now Pay Later (BNPL) comes in many guises and has quickly established itself as one of the most widely used forms of credit. In a rapidly growing market, better known providers like Swedish-based Klarna have been joined by innumerable others, with BNPL now widely promoted by many retailers and service providers. Kwik Fit’s Service Plan is an example of Buy Now Pay Later. With no fees or interest rates and clear repayment dates, this offer is clearly differentiated from the high APRs and uncertain repayment timeframes associated with credit cards. The attractions for consumers are obvious. For example, spreading the financial burden of paying for a holiday using lastminute.com’s BNPL offer, could make a booking feasible for those not able to spend £1,000 upfront.

Kwik Fit Service Plan

Pay for your next Full Service in small, manageable payments with Kwik Fit Service Plan.
If you’re looking for a smart way to pay for your car’s next annual service – we’ve got you covered. Whether your vehicle is brand new or 15 years old, Service Plan allows you to fix the cost of your next Full Service at today’s price and pay for it with simple monthly instalments. You can even add the cost of an MOT test. Your Kwik Fit Personal Service is paid for over 9 instalments avoiding a lump sum payment for your service. For example, rather than having to pay £178.80 for your next annual service, you will pay 9 instalments of £19.87. https://www.kwik-fit.com/servicing/information/serviceplan, accessed 25/01/2023.

Lastminute.com Flexible Payments

Book your dream trip and pay for it a little at a time, with no added interest.
Book now, pay later with 0% interest.
With our flexible payment options, you only need a deposit to reserve your trip. Then settle the bill before you travel. For a stress-free, interest-free holiday.
1. Choose your trip
2. Reserve with a deposit
3. Pay the rest later
Looking forward to… Maldives. Choose 10 nights hotel + flight to Maldives £1,000 total. Pay a deposit of £100. Pay the rest in 5 instalments of £180 each month. https://www.lastminute.com/deposit.html, accessed 23/01/2023.

These are both examples of Buy Now Pay Later (BNPL) propositions. BNPL is a form of short-term financing, also referred to as point-of-sale instalment loans. Customers pay in multiple instalments, often over a short time-period, without incurring interest charges. Unlike with traditional credit cards, use of BNPL payment plans does not directly impact an individual’s credit score. With the credit and affordability checks typically less thorough than for other credit forms, it is easier to be approved for BNPL.

However, this easy access to credit can be risky for consumers. Recent research reveals that not all consumers recognise BNPL as a form of credit, with many confused by the products and terms or struggling to repay. As the cost-of-living crisis deepens and household incomes are increasingly squeezed, the financial wellbeing of growing numbers of BNPL users could be at stake. Although the UK Government recognises the problems associated with BNPL and has stated its intention to act, it is yet to enact promised legislation to protect consumers.

Five million consumers

During the COVID-19 pandemic, the use of BNPL products almost quadrupled in the UK, to £2.7bn of transactions and five million customers.[i] BNPL is explicitly marketed as an alternative to traditional credit-based payment options, such as credit cards, overdrafts and other loans. Although instalment plans and payment terms differ depending on the BNPL provider, customers typically have up to four months to pay back, often through weekly, fortnightly or monthly repayments.

Klarna is the smooth and safe way to get what you love today, and pay over time.
Klarna’s Pay in 3/Pay in 30 days are unregulated credit agreements. Borrowing more than you can afford or paying late may negatively impact your financial status and ability to obtain credit. 18+, UK residents only. Subject to status.
Pay later with Klarna.
Millions of savvy shoppers have already chosen Klarna when shopping at their favourite retailers. Try before you buy and pay in full up to 30 days later, or split the cost into 3 interest-free monthly instalments.
The brands behind the buzz.
With the Klarna app, you can pay in 3 interest-free instalments at all your favourite brands – that’s right, all of them!
Spread the cost at any store.
Elevate your shopping game. Shop your favourite brands. Access the latest deals and track price drops. Manage your payments, report returns and get help if you need it. https://www.klarna.com/uk/smoooth/, accessed 17/01/2023.

Leading global BNPL players have sophisticated marketing programmes in place. While some offer BNPL across a range of products, others target specific needs or markets. For example, Fly Now Pay Later in the travel sector and Payment Assist in the auto repair market. All have propositions designed for consumers who need or wish to delay paying in full for products and services.

Brand names such as Afterpay, SplitIt, Pay in 4, Flexipay, Pay Later, and Flex, are chosen to clearly convey these key benefits. According to UK challenger bank Monzo’s marketing, “Credit cards are the past. The future is Monzo Flex. Spread the cost of pretty much anything, even things you bought 2 weeks ago. Use Flex online or in-store, with protection for eligible purchases. If eligible, it’s interest free over 3 instalments…”[ii].

This explicit positioning against traditional credit cards is typical of the messaging. Providers state they operate as virtual credit cards, offering the same payment protection, but without the hidden costs and harsh penalties of the credit card brands.

BNPL has been called “the future of millennial finance”[iii], used to spread the costs of shopping, including for those who need to complete a purchase ahead of payday[iv]. According to a study by HSBC[v], 20% of consumers said they used BNPL to spread payments, while 15% were attracted by its ease of use. Most use BNPL to buy clothes, followed by food and drink, shoes, appliances and electronics, and games and toys. However, as the cost-of-living crisis continues, the worrying practice of using BNPL to purchase food and other household essentials is likely to increase[vi].

As BNPL use continues to grow, suppliers such as AfterPay and Klarna have been joined by PayPal’s offering (Pay in 4) and Apple (Apple Pay Later). AfterPay is a digital payment platform offered to online shoppers that allows them to delay payments on purchases. Users can make weekly payments on items purchased until they are paid in full. No credit check is required and no interest is charged. Klarna offers a pay-in-four payment plan, which lets shoppers split their purchase into four equal instalments to be paid every two weeks, with the first due at checkout.

“Klarna makes online shopping simple. Buy what you need today and pay later. Effortless and safe. We make shopping smooth. Our aim is to become the world’s favourite way to shop and bring flexible healthy financial services to consumers globally.”[vii]

Apple’s Pay Later lets customers split a purchase into four equal payments over six weeks, with no interest or fees to pay. Apple Pay Later is available for purchases in apps and online when customers check out with Apple Pay. It is built into Wallet, so customers are able to track what they owe and when they owe it. Developments from PayPal and Apple are likely to expand the reach of BNPL as the sector continues to grow.

Consumers should question

Recent HSBC research shows that in the UK BNPL is now the second most used form of finance (32%), behind credit cards (69%) and ahead of overdrafts (27%), retail finance (15%) and personal loans (13%). Women are more than twice as likely as men (43% vs 21%) to use BNPL. The payment method is most popular with 25-34 year-olds, nearly half of whom say they have used BNPL in the past year (49%), followed by those aged 18 to 24 (45%) and 35 to 44 (45%). However, HSBC is warning consumers to exercise care and to make sure they can answer these questions before using BNPL:

Would I have bought this item in the first place if BNPL wasn’t an option?
Do I have and will I have enough money to make the future payments?
Is there a better or more cost-effective way to borrow?
How many BNPL agreements do I already have?

Debt charity StepChange offers similar advice[viii]. HSBC warns that any remaining instalments are automatically taken from the consumer’s account at set dates and that missed payments can lead to late payment fees, consumers exceeding overdraft limits and damaging their credit scores if payments are late or missed.

The repayment issue is significant. According to Barclays’ research[ix], “Two in five Gen Z shoppers using unregulated BNPL feel ‘overwhelmed’ by repayments”. Meanwhile independent consumer group Citizens Advice says more than a quarter of those using BNPL have regretted it. In research[x] conducted last year, the advice charity revealed that one in 12 people turned to BNPL to cover basic costs, such as food and toiletries. With BNPL not confined to higher ticket items such as car servicing or overseas holidays, the problem looks set to grow.

Affordability checks

According to Citizens Advice[xi], more than two in five BNPL customers have had to borrow money from other sources to make repayments. Overdrafts, borrowing from friends and family, loans, payday loans and credit cards are all being used to prop up BNPL payments. Younger shoppers were most likely to borrow to pay off BNPL purchases. 51% of 18-34 year olds borrowed money to pay off BNPL debt, compared to 24% of over 55s. Citizens Advice urgently wants more regulation, including market-wide affordability checks and better information at checkouts. Its research found that 10% of BNPL customers do not understand how BNPL repayments work.

If repayments are never missed and consumers fully understand the process, BNPL can provide a no-cost way for consumers to borrow money and to acquire desired products and services. However, with the increasing use of BNPL to pay for essentials and with so many consumers struggling to understand the product and its consequences, the potential to increase financial vulnerability is evident.

Regulation and government procrastination

The Money and Pensions Service is concerned that using BNPL – which is a credit product – to pay for essential items is a potential indicator of significant financial stress.[xii] Following the Woolard Review in 2021, the Financial Conduct Authority also expressed concern, stating that “changes are urgently needed: to bring BNPL into regulation to protect consumers; to ensure that there is secure provision of debt advice to help all those who may need it…”[xiii].

In 2021, the UK Government promised greater regulation of BNPL and that consumers would have greater protection under FCA rules[xiv]. The expectation is that all BNPL providers will have to carry out the same affordability checks as other credit lenders. Under the proposed new rules, BNPL providers will only be able to offer agreements that can afford to repay and customers will be able to complain to the Financial Ombudsman Service. However, despite Government consultation ending last summer, there is still no legislation on the books.[xv] Meanwhile, the cost-of-living crisis is driving demand for BNPL, including for food and other essentials. Further delay is not in the interests of consumers and does nothing to support the credibility of this fast-growing finance sector. [xvi]

BNPL products have grown quickly as an attractive payment option for many consumers. Through sophisticated branding and marketing, suppliers have positioned their ability-to-buy-now offer away from traditional credit options. However, as the risks to consumers became increasingly evident, there is an urgent need for the long-promised FCA protection. There are also serious questions for consumers who are tempted to use BNPL, including whether they understand what they are taking on, if they appreciate the potential consequences, and whether they will be able to repay. These consumers deserve clarity and protection from a more regulated BNP market.

Through understanding the impact of organisations’ activities, behaviours and policies, the Centre for Business in Society at Coventry University seeks to promote responsibility, to change behaviours, and to achieve better outcomes for economies, societies and the individual.

References

[i] The Woolard Review – A review of change and innovation in the unsecured credit market; https://www.fca.org.uk/news/press-releases/fca-publishes-woolard-review-unsecured-credit-market.

[ii] https://monzo.com/flex/, accessed 23 January, 2023.

[iii] https://www.theguardian.com/business/2021/sep/18/the-surge-in-buy-now-pay-later-and-why-we-should-be-worried, 18 September, 2021.

[iv] https://www.beauhurst.com/blog/top-buy-now-pay-later-companies/, Miriam James, 27 October, 2021.

[v] https://www.hsbc.co.uk/financial-fitness/managing-debt/buy-now-pay-later-what-you-need-to-know/.

[vi] https://www.fincap.org.uk/en/reviews/helping-those-who-use-credit-to-make-ends-meet.

[vii] https://www.klarna.com, 17 January, 2023.

[viii] https://www.stepchange.org/debt-info/buy-now-pay-later.aspx, 25 January, 2023.

[ix] https://home.barclays/news/press-releases/2022/03/two-in-five-gen-z-shoppers-using-unregulated-bnpl-feel–overwhel/, 3 March, 2022.

[x] https://www.citizensadvice.org.uk/about-us/about-us1/media/press-releases/one-in-12-now-using-buy-now-pay-later-to-cover-essentials/, 11 March, 2022.

[xi] https://www.citizensadvice.org.uk/about-us/about-us1/media/press-releases/two-fifths-borrowed-to-pay-off-buy-now-pay-later/, 8 June, 2022.