The rapid growth of buy now, pay later services during the pandemic and their popularity among people facing financial challenges reinforces why there must be no delay to robust regulation of the sector, according to Which?.
Marketing and media portrayals of buy now, pay later firms have created a stereotype of the typical user – young women in their early twenties keeping up with the latest fashions by spreading the cost of their purchases, interest-free.
However, a new Which? report, including extensive in-depth profiling of typical users of buy now, pay later providers such as Klarna, Clearpay and Laybuy, reveals this portrayal is not the whole truth.
The consumer champion estimates that a third (33%) of the UK adult population have used a buy now, pay later product. While it is true that older consumers are less likely to have used buy now, pay later, it is clear that these services are not just being used by young people to keep up with fashion trends.
The consumer champion has found that some people are using buy now, pay later to access credit at stressful and challenging times in their life and may be experiencing harmful consequences as a result.
Respondents aged 39 or younger were more likely to report having missed a buy now, pay later repayment, while three quarters of those who had missed a payment had experienced a challenging life event in the last 12 months.
Which? analysis suggests those with dependent children are 71 per cent more likely to have used buy now, pay later, while having a household income of between £10,000 and £50,000 increases the odds someone will have used buy now, pay later by half (50%) when compared with someone who has a household income of less than £10,000. Households earning over £50,000 are a further 14 per cent more likely to have used it.
Missing a credit repayment or bill or experiencing a major life event – such as getting married, having a baby, moving home or being made redundant – increases the odds of using buy now, pay later by around a third (38% and 35%, respectively).
Buy now, pay later usage has grown rapidly during the pandemic as consumers turned to online shopping during lockdowns. Two in five (42%) of survey respondents who have used buy now, pay later have done so in the last year.
Despite using other forms of credit in the last 12 months, a quarter (26%) of respondents who have used buy now, pay later credit in the last 12 months have a pessimistic view of being able to cover an unexpected expense of about £500 using credit. This compares with just a fifth (18%) of the general population.
This raises concerns about the rigour of buy now, pay later firms’ affordability and credit checks and risks giving people a false sense of security about their financial situation if they are inappropriately cleared for buy now, pay later.
While four-fifths (81%) of buy now, pay later users had never missed a repayment, users of smaller buy now, pay later firms were more likely to have fallen behind – with up to a third (31%) of those who had used a smaller buy now, pay later provider missing a payment.
The report strengthens the case for greater regulation to ensure consumers are aware of the risks of buy now, pay later providers – namely that they could fall into debt and if they do, firms may take action.
Which? believes buy now, pay later firms should be more transparent about the risks of using their services and provide upfront information about late fees and what consumers can expect if they miss a payment.
Mandating credit checks before a user is approved and ensuring that providers communicate with each other so that an individual is not able to miss payments with one firm and then take out an agreement with another company would also help prevent consumers from getting into financial difficulty.
Rocio Concha, Which? Director of Policy and Advocacy said:
“Our research challenges the stereotype of buy now, pay later as a product used by Gen-Z and millennials and shows it is also popular with more affluent consumers, people with families and those who are facing financially challenging times.
“Our findings raise concerns that buy now, pay later users might not be fully aware of the financial commitment they are signing up to – putting them at risk of accumulating a big debt.
“There should be no further delay to plans for regulation, which should include much greater marketing transparency, information about the risks of missed payments and credit checks before consumers are cleared to use buy now, pay later providers.”
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Notes to editors
Which? conducted the largest-ever survey in the UK on buy now, pay later, involving collecting demographic characteristics as well as data on respondents’ financial attitudes, personal circumstances, use of other forms of credit and experience of certain life-events. The consumer champion also included questions on their experiences after having used buy now, pay later credit to give an early indication of emerging harms.
The consumer champion surveyed 15,008 UK consumers – this included 4,697 people who had ever used buy now, pay later and 1,978 who had used buy now, pay later in the last 12 months. While these respondents are not representative of buy now, pay later users as a whole or of individual brands, the survey size means they can provide a powerful indication of where harm in the buy now, pay later market may exist.
The report is available to view at this link: https://www.which.co.uk/
Major life events
When asking consumers if they had experienced a major life event, Which? asked if they had experienced any of the following life events in the last twelve months.
Receiving an inheritance
Losing your job/ being made redundant
Reduction in working hours that you didn’t want
Being made bankrupt
Relationship breakdown/ separation from your partner
Serious accident or illness (myself)
Serious accident or illness of a close family member
Death of a parent
Death of your partner
Death of a child
Becoming the main carer for a close family member
This list is based on research from the FCA on what contributes to consumer vulnerability.
Rights of replies
Alex Marsh, Head of Klarna UK: “15 million consumers in the UK have chosen to use Klarna to make purchases, and over half of them tell us they think Klarna is a better alternative to credit cards. We don’t charge fees or interest, which saved British consumers £76 million in credit card interest last year. We conduct eligibility assessments, which include soft credit checks, every time someone uses Klarna, unlike credit card firms who check annually at best. This is why our default rates are lower than credit cards at less than 1%. We welcome proportionate regulation of BNPL products that deliver better outcomes for consumers while preserving consumer choice, competition and innovation.”
A Clearpay spokesperson said: “Unlike many BNPL providers on the market, Clearpay enables responsible spending and our inbuilt protections mean that customers cannot continue to accrue debt or fall into a revolving debt trap. We do not sell debt or charge interest, late fees are capped, and we automatically pause an account if a single payment is late.
“These customer protections go above and beyond what is required by law, and we are working closely with the FCA to build on what we already provide to create the right regulation for the sector – for example, we support the introduction of a third-party financial ombudsman for customers.
“The pandemic has prompted a surge in customers looking to spread out the costs of products without extortionate interest rates and payment terms. Clearpay provides a safe way to pay, without needing to consider revolving debt or interest-bearing products.”
Andy Harding, Openpay UK Managing Director, said: “It’s reasonable to think that people might use some form of BNPL service after a big life event. Moving house, for example, can be costly and often involves making one-off large value purchases. If used properly, BNPL is inherently less costly and risky than many other forms of credit which traditionally charge interest and don’t have a set repayment structure in place.
“We believe all credit products need to be used responsibly which is one of the reasons why we ask customers to make the first payment upfront. Openpay does everything it can to help customers meet their payments. Our mobile app provides clarity on upcoming instalments, our customisable monthly plans fall in line with most payday cycles and our customer journey informs the customer of their responsibilities at all key stages including check out.
“Additionally, payment reminders are sent ahead of payment due dates, with late fees not being charged until two days after the due date to give customers extra time. Support is offered to consumers in financial difficulty, and if a payment is missed accounts are frozen and no further plans can be taken out until any outstanding arrears are made current. Openpay also has a financial hardship policy in place for any customers who may be experiencing financial difficulty, including as a result of COVID-19.
“Openpay has been working with the Financial Conduct Authority (FCA) to help ensure that any further regulatory measures for the BNPL sector help ensure consumer choice, product innovation and strong consumer protections.”
Gary Rohloff, Co-founder and Managing Director of Laybuy, said: “Firstly, it’s important to recognise why more consumers are using BNPL. With BNPL, customers do not pay any interest, ever. Our customers are turning away from more traditional forms of credit, like credit cards or store cards, because they can buy things they need and pay it back in regular instalments that works to their budget, but crucially does not get them into debt.
“Not all providers are the same. For example, with Laybuy, we are the only provider in the UK to conduct hard credit checks on customers. That means we check a customer’s creditworthiness and we typically reject around 25% of people applying to use Laybuy. Our customers on average are around 33 and spend £65 per transaction.
“Although BNPL is a lower-risk credit product, there are occasions when customers may fall behind on repayments. Firstly, we are transparent on our website to what happens if you do miss a payment. We do charge late fees at £6 but capped at £24. At the moment someone misses a payment, their account is frozen meaning they cannot buy any more items, but more importantly we communicate with the customer to understand their situation and have a hardship policy to support them if needed.”
Samantha Palmer, Managing Director of Payl8r, said: “Payl8r was created by Millennials for millennials largely out of frustration for the archaic ways of underwriting.
“We were young professionals in good jobs, yet couldn’t get credit so we embarked on a journey to create a finance solution which took into consideration a customers actual “live affordability” and not just their credit score or lack of.
“We adopted Open-Banking as we wanted to make sure we were lending as ethically and responsibly as possible and have been operating a regulated business since inception.
“We very much invite the change to the BNPL arena and as a regulated firm already it’s been long overdue. Our competitors, most of which offer unregulated BNPL plans, have almost lured customers into a false sense of security when it comes to taking out instalment plans and dare I say, been a little overzealous in their acceptances at the detriment to customers.
“Whilst we all want to have the slickest, quickest application form, you do have to ensure that you are adequately assessing a customer’s suitability and affordability for the loan which is something that the BNPL space has been missing. Whilst Payl8r operates in the BNPL space, we are fundamentally different in that we are already regulated by the FCA and lending responsibly and ethically is at the core of everything we do therefore the new changes will not directly affect us but they will no doubt make BNPL a much safer space to shop.”
No other buy now, pay later providers were approached for comment.
Which? is the UK’s consumer champion, here to make life simpler, fairer and safer for everyone. Our research gets to the heart of consumer issues, our advice is impartial, and our rigorous product tests lead to expert recommendations. We’re the independent consumer voice that influences politicians and lawmakers, investigates, holds businesses to account and makes change happen. As an organisation we’re not for profit and all for making consumers more powerful.
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