/ Money

Why we’re calling to regulate Buy Now, Pay Later

We want the Financial Conduct Authority (FCA) to be given new powers over ‘buy now, pay later’ companies. Here’s why we think regulation is needed.

Update 02/02/2021: FCA review

The Financial Conduct Authority (FCA) has today published a review into the unsecured credit market, including the regulation of unregulated buy-now pay-later products.

Regulation to protect consumers from building up large debts that they will struggle to pay off is clearly required: these services continue to surge in popularity at a time when people’s finances are under significant pressure.

There’s no time to lose. New rules covering this type of lending must be introduced as soon as possible to ensure action can be taken if firms are treating customers unfairly.

11/12/2020: Calling for regulation of BNPL

Over the last few years, buy now, pay later has emerged onto the scene as an increasingly popular way to pay, with companies such as Klarna, Clearpay and Laybuy offering delayed payments at the online checkouts of popular stores such as Asos and Marks and Spencer. 

These new credit products, also known as bnpl, offer you the ability to spread out the cost of your purchase.

Instead of paying upfront, you can delay payment to a later date, with popular options being pay in 30 days or paying by instalments. Unlike other credit products, such as credit cards, these new buy now, pay later options won’t charge you interest, although some do charge late fees.

These products have become popular as they allow you to spread the cost of almost any purchase. For example, we’ve heard reports of people using buy now, pay later to buy clothes in different sizes and return the items which don’t fit.

While new products are quick and convenient, we are concerned that some features of these products may be harmful to some people. In particular, we are concerned that these products might encourage people to spend more than they can afford to.

A worrying trend?

It’s clear that these products increase spending. In fact, buy now, pay later companies often market themselves to retailers on the basis that people spend more when they use buy now, pay later.

For example, Clearpay has claimed that on average, firms using its service experience a 30% boost in the value of orders.

Our investigations have also uncovered evidence suggesting that buy now pay later users might be spending more than they would do otherwise: a survey for our recent magazine investigation found that nearly a quarter of bnpl users (24%) said that they spent more than they had planned because the service was available. 

We’ve also heard concerns from debt advice charity Stepchange that they have seen more people coming to them with bnpl related debt.

Powers to intervene

With buy now, pay later growing rapidly in the UK, it is important that the regulator has the right tools to step in and prevent any harm caused by these products.

However, the Financial Conduct Authority, which regulates similar products such as credit cards, does not currently have the powers to intervene if bnpl companies aren’t treating consumers fairly. 

We want to see bnpl firms like Klarna and Clearpay regulated by the Financial Conduct Authority. By giving the FCA the powers to regulate the bnpl market, the Government would enable it to more effectively monitor the treatment of consumers by bnpl firms.

It would also allow the FCA to intervene where consumers are being harmed by bnpl business practices.

The FCA is already looking into unsecured credit, which bnpl is one example of. We have given evidence to that review and will continue to feed in our insight and your experiences as their work progresses.

We will be paying close attention to what their findings are on bnpl products and, if necessary, taking action to push for regulation over the coming year.

Have you used buy now, pay later to pay for things? What was your experience like?

Michael Ives says:
14 December 2020

Hi, our freezer packed in the other day just a week after the tumble dryer. As money is a little tighter than usual I was attracted to the buy in 3 instalments plan Klara offered on the Hughes website. I don’t like having unnecessary credit scoring or checks so this seemed ideal – buy the item, pay around £100 followed by two further monthly payments of £100 in January and February. I did see the other offers you have mentioned but was concerned firstly, about a credit search and secondly, having this all to pay in 6 or so months time and the possibility of falling into the trap of having interest added.

Michael, a sensible use of Klarna if may may say so. All you have to do is remember to make the future payments.

However, one question to consider is whether you could buy a product cheaper through another retailer who does not offer bnpl. Even if you do not want to pay all the money upfront you could, if you have one, use your credit card to spread the payments if the lower cost more than offest interest charges.

A criticism of bnpl stems from “Our investigations have also uncovered evidence suggesting that buy now pay later users might be spending more than they would do otherwise: a survey for our recent magazine investigation found that nearly a quarter of bnpl users (24%) said that they spent more than they had planned because the service was available. “. Well, isn’t this same criticism fairly levelled at credit cards, the most used method of making payments?.

I think the main point of this discussion should be to have bnpl providers regulated by the FCA like most other reputable credit providers.

Does the protection we have with chargeback and section 75 still work when paying with these methods?

I suggest you ask the company, Kev. I recall that Money Savings Expert reported on some loopholes relating to our Section 75 protection.

I strongly support the call by Which? to require companies that offer ‘buy now, pay later’ services to come under the remit of the FCA. It would be interesting to know why this protection was not in place before they were allowed to trade.

I am well aware that some people do get into debt as a result of illness, redundancy and other good reasons but there seems to be something immoral about companies encouraging us to live in debt rather than save and buy when we can afford to.

I think we also encourage ourselves to do this. We can use self restraint.

Many people do live very successfully by getting what they want first and paying on tick, rather than saving until they can pay. This may be for household goods, house extensions, holidays. Providing they understand their finances and know they can repay – barring the unforeseen – then I see no problem if that is a lifestyle they choose.

Others do not have this restraint, or have an unstable financial situation, or don’t (want to) understand the consequences.

If an “essential” bit of equipment stops working – fridge freezer breaks, car needs repairing, a heating repair – then saving up before it can be sorted is not an option. It is the non-essential spending where we can criticise others. But credit cards gave us this facility decades ago and it has not been a wholesale disaster.

These companies do not force us to use credit but they provide the means for us to make a choice. What we need is to educate as many as possible in the ways of the financial world from an early age.

If you can avoid debt you will have more money to spend than if you are paying interest. I have not looked at buy now pay later deals and assume that there might be better deals elsewhere. I once bought a car on 12 months interest-free credit, but only after failing to find a better deal.

I don’t remember being given financial advice but my parent were careful with money and minimised expenditure, so that if it was necessary to spend money they could rely on their savings. That has always been my approach.

Although I do have credit cards I pay them off in full to avoid interest charges. Once I was ill and forgot, so set up direct debits to settle my credit card bills.

I see it as very sad that thanks to student loans, young people are encouraged to live in debt and may become conditioned into believing that this is normal. Consumerism has encouraged many to live beyond their means and in the worst cases has resulted in mental health problems, eviction and misery – even suicide.

Buy now, pay later and waive the protection you would have had if you had paid by credit card. A recent press release by Which? provides a reminder: https://press.which.co.uk/whichpressreleases/shoppers-at-risk-from-online-retailers-with-returns-policies-that-flout-consumer-law-which-reveals/

Illegal terms and conditions seem a clear case of something that Trading Standards should deal with? Have they been reported?
The press release says “Buy Now, Pay Later (BNPL) services offer speed and convenience at the checkout,“. But so do credit (and debit) cards with the former offering buy now pay later terms – 1 month minimum free of any interest.

Unsecured credit services are currently being investigated by the FCA and the findings and recommendations will be published in the Woolard review: https://www.fca.org.uk/about/woolard-review-unsecured-credit

If you buy by credit card you have the S75 protection (for purchases over £100) that we discuss frequently and there is the possibility of making a chargeback claim against your bank if you pay by debit card, though no guarantee that this will be successful.

I don’t understand why Klarna et al. were allowed to provide credit services without protection in place.

I agree that they should be brought within the framework of s.75 of the Consumer Credit Act because the service they are offering, and any othered deferred payment scheme, is a form of credit.

I assume that being made to provide s.75 protection would increase their operating costs which would be resisted by retailers. As well as to capture the propensity of customers to spend more with ‘buy now pay later’ than they otherwise might, as reported in the Intro, retailers probably offer such payment services because it attracts customers who are on the edge of their credit limits or who cannot get a credit card or store card.

The article does not say what, if any, checks are made before a customer can use a bnpl facility.

Klarna, at least, must be feeling the heat because they took out a full page self-defence advertisement in Saturday’s Daily Telegraph.

I was horrified to read the list of companies that are making use of Klarna, and that’s just one of the companies providing BNPL services. Like the interest-free period provided by credit cards there is no cost if all goes to plan and you pay off your debts in time. The danger of sailing this close to the wind is that you are faced with unexpected expenses and there is a risk of ending up in expensive debt.

Free credit is appealing, but is it weaning more people in the direction of long-term debt? As John has said, BNPL could attract people who are already in problems with debt.

Yes, the list of stores using Klarna is quite staggering and in many cases it’s probably because they consider they cannot afford not to offer an unsecured payment facility.

According to Wikipedia, “Klarna Bank AB, commonly referred to as Klarna, is a Swedish bank that provides online financial services such as payments for online storefronts, direct payments, post purchase payments and more. Their core service is to assume stores’ claims for payments and handle customer payments, thus eliminating the financial risks for both the seller and buyer”. That must come at considerable cost to the participating stores and that ultimately feeds into prices for all customers.

I’d seen that it’s a Swedish company and Clearpay is Australian. Those of us who don’t use these services will be contributing to the cost. I placed an order with Marks & Spencer recently and was dismayed by their prices.

According to the company’s website, this is how Clearpay works –

1. Select Clearpay at checkout and fill out a short form to get an instant approval decision.
2. Clearpay pays the retailer upfront for you so they can ship your order straight away.
3. Clearpay splits the cost into 4 instalments, taken automatically every 2 weeks. You’ll pay the first instalment at the time of purchase.
4. Clearpay is 0% interest and free when you pay on time. The only fees are if you’re late making a payment. [No information is given on the level of such fees and the repayment terms].

The government are now proposing to regulate this practice.

Transferring risk is a common business model and used by government and local authorities but it always comes at the expense of the service user [customers]. Once intermediaries [like the BNPL service providers] are involved there is the likelihood that commission rates will rise relative to other price factors over time and increase the rate of inflation, and that will be compounded if interest rates return to historic levels.

I agree, John. Somewhat selfishly I wonder how much those of us who don’t use BNPL are paying for others who do.

A recent press release from Which? should help publicise the current risks of using BNPL to consumers: https://press.which.co.uk/whichpressreleases/shoppers-at-risk-from-online-retailers-with-returns-policies-that-flout-consumer-law-which-reveals/

As I said above regulation is being proposed after a 4 month investigation. For example https://www.theguardian.com/money/2021/feb/02/buy-now-pay-later-klarna-fca-covid-19-pandemic

As I understand, it BNPL providers charge the retailers so all of us will contribute one way or another. As far as defaulters go then, just like unpaid credit cards, unarranged and outstanding overdrafts and almost any other uncleared debt, we all pay through higher prices or credit charges.

Which? is looking to hear from people who have used Buy Now Pay Later providers and would be willing to be featured in a story. If you have used Buy Now Pay Later to help with payments after experiencing a major life event (such as moving home or having a baby) or because you thought the process would be simpler than applying for other forms of credit, please leave a comment with your story. We’re also interested in hearing from anyone who has experienced issues with or fallen in to debt whilst using Buy Now Pay Later. Thank you!

I have a story of identity theft & fraud due to non-existent ID checks with a BNPL company, followed up with denial and withholding money from the victim (along with email chain evidence). Would this make it into your article?

Hi Dave, thanks for getting in touch! Would you be happy to be put in touch with one of our writers about this?

Buy now, pay later firm Klarna to offer ‘pay now’ option: https://www.bbc.co.uk/news/business-58948182

I’m sure we don’t need Klarna et al. to be able to pay for goods when we buy them.

Seems rather like doing your own online bank transfer. Why do it?

I am in two minds about these buy now pay (a bit) later outfits.

They charge the retailer (2.5% + £0.20 from what I find online) whereas, from what I can see, credit card fees are from 0.65% + £0.02. So they put up costs and allow people without credit cards to use an instalment payment option. Klarna claim the transaction value at a retailer is increased by 40% using their “service”. So clearly it entices people to spend more than they otherwise would, and maybe without the means to fund a purchase without damaging their overall finances.

On the other hand, credit cards have been enticing people to spend more than they should for years. So the mechanism is established.

But while we criticise such payment methods it is rather pointless unless they are illegal which, as far as I can see, they are not.

How do we regard shops that offer interest-free credit, those that offer buy and pay nothing now and pay in 12 months without charge, and all the other temptations placed in front of us to spend more money we don’t really have on non-essentials?

I don’t agree that it is pointless to offer criticism unless something is illegal, Malcolm. We both do this frequently!

It is my opinion that encouraging people to spend money they don’t have is irresponsible even if it is legal.

Of course we can criticise but the point I was making was what outcome do we expect from criticism? If Klarna and co payment methods are not going to be stopped then simple criticism seems pointless. What would have point is educating people to avoid payment methods that drive up costs and that are inappropriate to their financial standing. But we know that doesn’t work – well, not in general.

Do we have any constructive proposals that would deal with inappropriate (well, in our view) credit provision? Does anyone have a good case to make for paying the Klarna way?

Education only works if the recipient is receptive, as I have said so many times. Those working for Citizens Advice and other charities put in a great deal of effort to help those who have been persuaded to spend money they don’t have.

One ‘constructive proposal’ is that it should require some effort to obtain credit rather than this being an easy option. For example, new credit card holders should be required to pay the balance in full each month by default. Once they have demonstrated that they can do this they could be allowed to pay less than the outstanding balance, subject to periodic review.

From the recent Which? article: “Which? believes there must be no further delay to the regulation of the BNPL market to ensure greater transparency on fees, credit checks and repayments on retailers’ websites.” I fully support this.

I agree with constructive proposals, as I have said.

So, one would be to require all credit providers to do a credit check before granting a loan?

For credit cards the limit should reflect the holder’s capacity to pay which could be demonstrated by, perhaps, providing bank statements. Otherwise a low initial limit could be set and an increase only considered when a satisfactory payment record is achieved.

Where credit, such as Klarna, is used I would like to see all the charges paid by the customer and not charged to the retailer.

I thought that loan providers already did do a credit check before releasing money, but I don’t have experience.

It’s not just BNPL companies that charge fees to the retailer as well as to their customers. Before fees for paying by card were abolished a friend with a small business showed me how much he paid to provide his customers with card facilities and at the time he was paying considerably more on credit card transactions than ones done by debit cards. Maybe the abolition of card fees was in some respects an own goal.

Perhaps some input from those who had been helped into debt by BNPL would be useful.

Perhaps I should have said “effective” credit check. That should prevent many subsequent difficulties. Payday loan companies either did not do credit checks or, if they did, they were ignored, in my experience.