With stores slowly reopening and social distancing rules relaxed but still in effect, it’s a good thing we can shop online — and that is easier than ever.
However, many now wonder whether the age of friction-free spending doesn’t come with its own dangers — and one tool of particular concern is Buy Now Pay Later (BNPL).
BNPL products let us buy stuff without having to pay anything upfront, instead allowing us to spread the cost or pay back in instalments.
It is not a new concept — as someone who recently bought a new sofa for their flat, I’ve appreciated paying back the cost over twelve months at no interest, rather than taking a big hit all at once.
But now BNPL is not exclusive to high-ticket items like white goods or furniture. It’s available for increasingly small purchases (some as low as £10), with brands like Marks and Spencer, ASOS, & Other Stories, Nike, Glossier, Sephora, Apple and Lululemon all offering BNPL at checkout. And with this rise in providers, there are also more stories of consumers worried about how using BNPL may affect their creditworthiness or lead them into debt.
So can we make the most of BNPL options? How risky is it really?
Here are some thoughts explaining how it works, and where and why to be cautious.
How does Buy Now Pay Later work?
Usually found at check-out, BNPL products are essentially a kind of credit payment or form of debt.
The big names in BNPL include Klarna, Clearpay, Laybuy, Payl8r, Splitit and DivideBuy — you’ll spot them alongside the option to pay by debit, credit or Paypal. They’re all a little different, but all offer a suite of alternatives to finance your purchases. This includes options like paying back in 30 days, dividing your purchase into multiple instalments, or in some cases taking out a loan.
The benefits for retailers are myriad. They are paid upfront whilst the BNPL company takes on the risk of late or non-payments, and many BNPL companies also provide market insights based on customers’ purchase data. This information allows retailers to improve customer touchpoints, like their websites, newsletters, and adverts — and it works. Statistics from Klarna claim that firms using their product have seen a 68% increase in average order value, a 20% higher annual customer purchase frequency, and a 7% higher conversion rate from basket to checkout compared to traditional card payments. In other words, BNPL customers are spending more money and more often.
For customers, the primary benefit is that it takes out the pain of paying. It’s simple, fast and provides the ability to make instant purchases but delay spending money.
Sarah Kocianski from Fintech Insiders notes that BNPL appeals to different types of people because of its ease and appearance as seemingly ‘risk-free’. She says, “Risk-averse customers that want to avoid debt are attracted by interest-free instalment payments. These customers previously would have put off making purchases until they had the required funds saved, or decided against the purchase completely. Interest-free instalments are likely also particularly attractive to younger customers who want to purchase something immediately — such as fashion items which may not be available by the time they’ve saved — and do not qualify for a credit card due to lack of credit history.”
So why worry about using BNPL?
In the last few months, personal finance writers and consumer champions have been urging people to exercise caution when using BNPL. This is because stories of people falling into problem debt or who have seen damage to their credit scores thanks to BNPL are on the rise.
In the June 2020 issue of Which?, Chloe Cheung wrote about the risks to consumer credit scores, lack of shopping protections, and how charges build up in the case of late or missed payments. She also noted that fraud around BNPL may be becoming commonplace. (The topic was also touched on by Which? in January reflecting the recurring concern about the growing use of BNPL.)
There are also some concerns when it comes to the regulation of BNPL products. Alice Tapper, author and creator of Go Fund Yourself, recently launched a campaign and petition calling for BNPL schemes to be regulated in a similar way to credit cards.
Alice says, “Because some BNPL products do not charge interest, they fall outside of the FCA’s regulatory remit. This means there is insufficient protection for consumers, allowing retailers and BNPL providers to exploit their vulnerabilities. I’ve come across many people who have unwittingly used BNPL because it’s the default payment option on websites. It simply should not be possible to access credit by accident. Risk wording should be mandatory in adverts alongside better protection and information at check out.”
Worries for younger consumers are particularly high, especially those with a limited credit history and less experience managing credit. According to Compare the Market, not only are growing numbers of 18–24-year-olds using BNPL in lockdown, but 45% of young people who have used them in the last year have missed at least one payment. For these groups, BNPL could leave lasting marks on their credit history as well as lead to spiralling issues with their financial health.
It’s worth noting that companies are trying to address these concerns and regulators are also very much monitoring the sector.
“Regulators have started asking questions, particularly around the ease with which people can access this method of credit. The UK’s regulator (FCA) has published a set of rules on the products, however many providers’ offerings remain outside of regulatory remits,” says Sarah. “A significant challenge providers could face is if they see large volumes of customers getting into debt as a result of using their services.”
Should I use Buy Now Pay Later?
There are benefits to BNPL. Who doesn’t love the idea of trying a new outfit but only paying for the one that fits rather than faffing with returns and waiting for refunds?
But there are also risks. If you’re using BNPL, you’ll want to investigate the rules for that particular product, do your own due diligence when it comes to late fees or credit checks, and read the fine print when it comes to your consumer protections.
Resolving an issue if things go wrong is also not always as simple as the few clicks it takes to sign up, that’s why staying conscious of your spending and doing little things like setting up alerts for payments can really help.
“It’s really about being mindful,” says Alice. “BNPL anaesthetises the pain of paying which makes it much more likely you’ll overspend — being aware of this is really important. Try asking yourself: if this wasn’t BNPL, would I be paying this much money? BNPL has its benefits — the campaign is not about putting a stop to them — but we need better regulation and better protection for consumers at risk of falling into problem debt.”
Mindful spending helps us stay conscious of our money and our spending habits, maintaining good financial and mental health. Apply that to BNPL and it can be very useful — but do your research first.
After all, even if the pain of paying is delayed, it’s still worth being conscious and in control of your money.
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You can find out more about Alice Tappers campaign #RegulateBuyNowPayLater in iNews and the petition here.
Authors: Harriet Allner and ikigai
Harriet Allner is a writer, blogger and fintech specialist. She cares about stories that matter and is passionate about promoting conversation around money positivity and financial feminism.
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