Buy Now, Pain Later

Buy Now, Pain Later

The growth of online shopping over the pandemic has resulted in the proliferation of Buy Now, Pay Later services (BNPL) such as Klarna and Clearpay, which offer consumers the ability to receive goods now and pay for them over a small number of instalments. As BNPL operators are quick to point out at the checkout, these loans free consumers from the tyranny of the high interest rates and fees associated with credit cards and other traditional lending.


But the checkout is where the problems with BNPL start. With over 17 million users in the UK alone there is huge potential for financial harm in this under-regulated space, and the data to back this up is starting to emerge.


According to the FCA’s Woolard Review, BNPL users are often unaware they are even taking out a loan. At checkout BNPL is often presented as just another button, with little to indicate that it is in fact the start of a credit application. As such, users often do not give it the full attention they would give any other loan application.


This is by design. To increase uptake, BNPL application processes are designed to be quick and easy. This is achieved using soft credit checks to assess a customer’s ability to repay their loan rather than more in-depth hard checks. Adding to this, important information about the consequences of missing a payment is hidden away in the Terms & Conditions that everyone reads (or not…).


There is evidence that the checks on the ability to repay are not working. In the UK, 56% of BNPL users who had missed a payment also had credit card applications rejected in the previous 12 months. In the US, around 56% of BNPL users were behind on repayments in 2021. Users are often not in strong financial situations to begin with, indeed Citizens Advice found that 42% of BNPL users repay their loans with traditional forms of debt, such as credit cards.


In the world of consumer lending this is playing with fire. Core to any financial regulatory framework are the principles of consumer protection – treating customers fairly and offering appropriate products. BNPL operators, by obscuring what customers are signing up for, could be seen to be running afoul of these principles. Their practices increase the chances of financial harm.


The obscuring of vital information to entice people to take out loans verges on predatory conduct, and is attracting the attention of regulators. In the UK, BNPL operators will need to be approved by the FCA from mid-2023, will be required to make advertising clearer and not misleading, and affordability assessment requirements increased.


Players in the BNPL space must get ahead of the inevitable regulatory oversight if they want to do the right thing by their customers and, more cynically, present an attractive proposition when they access the public markets. Any hint of consumer harm will be a big red flag in the ESG assessments of sophisticated investors.

More about the authors

Robin Honeyman Responsible Investment Associate

Robin Honeyman is a responsible investment associate in the responsible investment team.

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