18 January 2024
What is Buy Now Pay Later?
Buy Now Pay Later (BNPL)
Data from the FCA has been published recently at the end of last year on Buy Now Pay Later (BNPL) usage in the UK, the research shows that shockingly, BNPL was used as a payment method by 27% of UK adults in the last 6 months of 2022.
This may not sound surprising to you, as these BNPL companies seem to be everywhere on every digital shopfront these days, but it is actually a significant increase. In the last 12 months leading up to the end of May 2022, only 17% of adults in the UK had used BNPL, a 10% increase in the latter half of the year.
But is this a negative thing? Not inherently, but this research suggests that it just may well be currently.
What is BNPL?
In this case, we will refer to BNPL when we talk about companies who allow you to spread the cost of purchases over a small number of interest-free payments, for example ‘Pay-in-three’ companies like Klarna or Clearpay.
This mode of credit is officially named Deferred Payment Credit (DPC) by the FCA in order to distinguish it from the older style “Buy Now Pay Later” interest-free periods from catalogues, in which there would typicall be a 6-12 month period to pay the balance interest free, and if it is not fully paid off, interest is then added on.
Why Does it Matter?
The FCA research looked at how often people use different BNPL services, it concluded that 14% of the total number of people in the UK who use BNPL services, buy more than 10 things a year with it. These will be classed as “Frequent Users”
The research then compared these frequent users to people who don’t use any BNPL services at all, and shockingly it found that frequent users are:
- More than 4 times as likely to have missed a bill or debt payment in 3 of the last 6 months
- Almost twice as likely to have doubled the total amount of debt they have in the last year
BNPL Usage isn’t a major issue if other credit usage is dropping
Increasing usage of these BNPL services won’t have too much of an adverse effect on your personal finances if other credit usage is dropping by as much as you’re using on BNPL.
For example, if you buy an item using Klarna, instead of using a credit card, that appears to be positive as you will not be paying interest, right? The issue is, that statement is only true if you can make the Klarna payments on time, without these payments leaving you short on money.
BNPL payments do not end up being interest-free if you have to pay more in credit card and overdraft fees to make the payments on time.
The FCA research looks at other credit usage on how things such as loans, cars and overdrafts had changed since BNPL became common, it found that:
- Only 10% of BNPL users use other modes of credit less
- 41% of BNPL users use other modes of credit more
This research is in line with research done into BNPL in the US, which found that on average, starting to use BNPL causes a rapid increase in payments that causes people to rack up bank overdraft charges & credit card interest and fees.
These numbers may seem shocking, but unfortunately they are not surprising, debt advisers have been seeing a steady increase in the number of clients that have BNPL debts that wh leading to increases in other debts. Citizens advice warned in 2022* that more than two in five BNPL customers had to borrow money to make the BNPL repayments.
Regulation is Needed
Currently, BNPL lending is not regulated in the UK, lenders who offer BNPL ‘Pay-in-three’ schemes do not have to be FCA authorized, make affordability checks or report to credit reference agencies.
This major loophole in regulation was highlighted in The Wollard Report (2020), and in 2021 the Treasury said regulation will be brought in, the consultation period for drafting legislation closed in April 2023.
It wasn’t long begore rumours arose, around July of 2023 it was said that the treasury had decided to make these changes slower after lenders had threatened to leave the UK market.
The major bodies of consumer and debt advice were shocked and appalled. MoneySavingExpert, Citizens Advice, Stepchange, the Money Advice Trust, and Christians Against Poverty wrote to the Chancellor urging him to take action and go ahead with the regulation as soon as possible:
“With the mounting pressure of the cost of living crisis, the provision of interest free credit might look like part of the solution for people struggling with bills. But unaffordable credit which can lead to spiraling debt is never a solution”.
There have been no significant updates since then, and this FCA research demonstrates just how necessary regulation on these companies is.