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Does the Buy Now, Pay Later market need more regulation?

More and more of us are taking advantage of services such as Klarna, Laybuy and Clearpay, so we can pay for purchases in instalments interest-free over a set period. But as the buy now, pay later market grows, is it time for it to be more heavily regulated?

Citizens Advice certainly believes so, as it’s calling for affordability checks to be carried out across the whole market and clear information for consumers at checkouts.

This came after a study by the group found that more than one in ten people who use buy now, pay later services didn’t fully understand how the repayments would be set up. This lack of understanding may partly explain why so many are borrowing money to make repayments and falling into serious debt.

In fact, Citizens Advice research found that more than two-fifths of customers who’ve used buy now, pay later services have borrowed money to make repayments. While many turned to friends and family for financial help, some also opted for overdrafts, loans and payday loans. And significantly, more than a quarter turned to their credit cards to repay what they owed.

Young adults were found to be especially likely to borrow money in order to pay off buy now, pay later purchases. In fact, 51 per cent of adults aged between 18 and 34 borrowed money to pay off this debt, compared with 39 per cent of 35- to 54-year-olds and 24 per cent of over-55s.

Commenting on the findings, Dame Clare Moriarty, Chief Executive of Citizens Advice, said: “Shoppers are piling borrowing on top of borrowing, and sinking into ever more desperate situations that can feel impossible to escape from.

“The spiral of debt from buy now, pay later to credit cards, loans and even payday lenders shows it’s not a risk-free alternative. Buy now, pay later is part of the credit industry and must urgently be regulated as such.”

What does the industry say?

Responding to the findings, buy now, pay later company Clearpay said 90 per cent of Clearpay transactions across the globe are made with a debit card, while 95 per cent of instalments are paid on time.

This, it said, demonstrates that its customers “use their own money to pay for purchases and that they understand how our repayments are set up”.

Clearpay went on to insist that it has always supported the introduction of “fit for purpose” regulation for the market that “protects the customer, and that it will continue to work closely with regulators and the industry”.

“We look forward to HM Treasury’s decision on the matter,” a spokesperson added.

But despite Clearpay’s apparent support for better regulation of the market, Citizens Advice remains concerned about the impact it can have on consumers.

“What scares me most is how easily people can slip into using buy now, pay later,” said Millie Harris, a debt adviser at the charity.

“They come to rely on it much more quickly than other forms of credit. It’s just a few clicks at a checkout. Too often that means people don’t realise how serious it is; that it is credit and there are consequences if they don’t repay it.”

The soaring popularity of buy now, pay later services and the ease at which customers are slipping into further debt as a result of using them highlights a key issue.

Many people are making financial decisions and putting themselves at financial risk without looking at the bigger picture.

Are customers who take out payday loans and rely on credit cards to make repayments even thinking about the consequences, such as what it’s doing to their credit rating and their ability to take out a mortgage?

Perhaps better financial education is the key, so people are able to make smarter, savvier decisions with their money, and avoid consequences that could affect them for years to come.

Sources
https://www.citizensadvice.org.uk/about-us/about-us1/media/press-releases/two-fifths-borrowed-to-pay-off-buy-now-pay-later/
https://www.bbc.co.uk/news/business-61719592
https://www.itv.com/news/2022-06-07/42-of-buy-now-pay-later-customers-borrowed-money-to-make-repayments

Should I worry about “buy now, pay later”?

Buy now, pay later schemes are becoming increasingly popular as firms such as Klarna and ClearPay partner with large online retailers ASOS and JD Sports, as well as many others. According to Statista, the usage of the Klarna app more than doubled between March and July of 2020, hitting over 460.000 monthly active users in the UK alone. 

The promise of try-before-you-buy allows consumers to make their order and send back any items they wish to return before making any payments, which reduces the need to wait for refunds to clear before making further purchases. With Klarna in particular boasting zero interest, customer fees or late charges and making their money through merchant transaction fees it’s understandable that customers are flocking to use the service. 

If it sounds too good to be true, that may mean that it is. What some consumers may not realise is that if they fail to clear their balance not only will their credit score be adversely affected but their debt can be passed on to debt collection agencies. 

The consequences of missed payments vary wildly between different lenders, and as this specific type of loan is so new to the market, the lack of regulation means that the associated fees and rates don’t need to be presented up front in the same way as with credit cards. 

Which? is calling for full regulation of these firms, as people are driven to spend more than intended, and more than they can afford, subsequently falling into debt. 

Research from Which? showed that nearly a quarter (24%) of users of these plans paid more than they intended to, and over one in 10 (11%) reported that they suffered late charges as a result. 

Interestingly, 26% of users reported that they had not planned to use a buy now, pay later plan at all until it was presented to them as an option at checkout. 18% claimed they used the plan as a result of being offered a discount for doing so. 

While these services do have their benefits for consumers, it’s important for consumers to also be aware of the risks associated with accruing debt.

Sources
https://www.creditstrategy.co.uk/news/news-top-stories/which-calls-for-full-regulation-of-buy-now-pay-later-firms–18601

https://www.theguardian.com/money/2018/nov/17/klarna-buy-now-pay-later-system-that-is-seducing-millennials#:~:text=Klarna%20allows%20people%20who%20shop,pay%20for%20their%20online%20order.

https://www.statista.com/statistics/1137411/klarna-monthly-active-users-uk/

https://www.cnbc.com/2020/12/14/buy-now-pay-later-plans-are-booming-in-the-covid-economy.html

https://pittsburgh.cbslocal.com/2020/12/15/coronavirus-pandemic-buy-now-pay-later-plans/