Call for stronger safeguards to warn shoppers of BNPL debt risk

Which? is calling for stronger safeguards to stop online shoppers from choosing Buy Now Pay Later (BNPL) to pay for products without knowing the risks, as new research from the consumer champion reveals many people do not think that they are taking on debt when using this payment method.

Buy Now Pay Later has soared in popularity in recent years as a way for consumers to pay for goods and services, with the biggest provider Klarna now boasting 13 million customers in the UK.

The research, carrying out in-depth interviews with 30 typical BNPL users, has raised concerns that shoppers do not fully understand the risks of choosing a ‘pay later’ option at the checkout.

Many of the BNPL users interviewed by Which? did not think of BNPL schemes as a form of credit, meaning they could unwittingly be exposing themselves to serious risks of missing repayments, such as late fees, marked credit reports or referral to a debt collector.

Instead, participants described the schemes as a ‘way to pay’ or a ‘money management tool’, rather than a credit provider. One user said: “It allows payments to be spread out for budgeting. It made things possible which in one go would have been extremely difficult and I would have probably had to borrow money from elsewhere.”

Though BNPL schemes are a form of credit, they work differently to more traditional methods of borrowing such as credit cards. Not all BNPL schemes run hard credit checks, for example, and users can normally sign up to a BNPL scheme in a matter of clicks.

Which? research found it was precisely this speed and simplicity when selecting BNPL at the checkout that contributed to users’ misunderstanding. Another user said “It seems really convenient and no hassle. It just asks a few questions so it doesn’t feel like you’re committing to a credit agreement.”

The research also revealed low engagement with BNPL providers’ terms and conditions. Most BNPL users said they either skimmed the T&Cs or simply ticked a box to say they had read them in full.

As a result, some users had a limited understanding of the consequences of missing payments, and the safeguards and checks carried out by BNPL providers. Some participants were not aware there were late payment fees at all.

Throughout the research, Which? also found that BNPL users do not consider the prospect they might struggle to make repayments. In fact, using BNPL schemes made some consumers feel less concerned about making purchases they would not otherwise view as necessary or affordable. “It softens the blow psychologically. It almost doesn’t feel like I’m blowing £100 on shoes,” said one participant.

Concerningly, many of the participants wrongly assumed the schemes were regulated. “I am surprised, I am shocked, they should be regulated. If you have a service that is not regulated you have no protection for consumers,” one participant said.

This lack of understanding around BNPL products is particularly concerning given previous Which? research that found people are more likely to be using BNPL at stressful and challenging times in their lives.

Missing a credit repayment or bill or experiencing a major life event – such as getting married, having a baby, moving home or being made redundant – increases the odds of using BNPL by around a third (38% and 35%, respectively).

Which? is calling for stronger safeguards to protect consumers, including steps in the checkout process to ensure people understand they are borrowing money when using BNPL, and warnings about the risks of using the schemes.

Key information, such as payment terms, late fees and the potential consequences of missed payments, should be communicated at the point of transaction to help consumers make informed choices. Given the immediate risk, BNPL providers should proactively make their key terms and conditions more accessible, rather than waiting for regulation.

Affordability assessment should also be carried out for all BNPL transactions ahead of regulation being introduced.

As the government’s consultation into regulation of the BNPL market closes, the consumer champion wants no delay in regulating these schemes to ensure that those who use it are properly informed and protected.

Rocio Concha, Which? Director of Policy and Advocacy, said “Buy Now, Pay Later (BNPL) schemes can offer speed and convenience at the checkout, but our research shows that many users do not realise they are taking on debt or consider the prospect of missing payments.”

“That is why there must be stronger safeguards to protect consumers and warn about the risks of using the schemes. Payment terms, late fees and the potential consequences of missed payments should be communicated at the point of transaction.”

“There must also be no further delay to plans for BNPL regulation, which should include much greater marketing transparency, information about the risks of missed payments and credit checks before consumers are cleared to use BNPL providers.”

Jayadeep Nair, Chief Product and Marketing Officer at Equifax UK, said “The soaring popularity of Buy Now Pay Later (BNPL) services has fundamentally changed the UK retail landscape by increasing access to affordable credit at the point of sale. Our data suggests that 28% of UK consumers were actively making repayments on BNPL loans in October 2021, which is around 2.8 million more people than at the start of last year.”

“With increased use comes increased scrutiny, and it’s wholly appropriate for the Treasury and FCA to now be weighing up the right level of regulation for what has become an extremely active and exciting part of the credit market.”

“BNPL providers have a responsibility to ensure that their services do not have a negative impact on the financial wellbeing of the consumers that use them. For all the good that BNPL can do for those that can manage their day-to-day finances, there are concerns that some users may be slipping through the cracks. Our research suggests that 43% of BNPL users in the UK admit to having missed a repayment, and 9% say it happens often.”

“To minimise that risk, we would like to see all BNPL firms share new and historic lending data with all the UK’s main credit reference agencies (CRAs) in a fair, clear and consistent way. Doing so will strengthen protection against overindebtedness, and help many people who use BNPL to get better deals on all kinds of credit. BNPL providers can share this data for the purposes of credit files today; they do not need to wait for any change to regulation.”

“We have already engaged with a wide range of BNPL providers to help them deliver FCA-ready creditworthiness assessments and responsible debt collection services and we are committed to working with the Government, the FCA, BNPL providers, and consumer groups to ensure that consumers are fully aware of the implications of BNPL products on their credit standing.”

Sarah Coles, Senior Personal Finance Analyst at Hargreaves Lansdown said “Regulation of Buy Now Pay Later needs to start now – not later. The Treasury’s consultation closes today, and the FCA has said regulations will kick in this year, but it can’t afford to drag its feet, because while it’s going through this process, the sector is mushrooming before our eyes. The growth of the market is phenomenal, with the value of transactions more than tripling in 2020 – to £2.7 billion. Since the consultation started in October, millions of people have taken out new loans they may not fully understand or be able to afford. Citizens Advice said that one in ten people used Buy Now Pay Later over Christmas alone.”

“The spending squeeze risks even more people turning to this market to help make ends meet, and the spread of these services across everything from fashion to food means it’s finding its way into every area of spending. There’s a real risk that building up these debts will erode people’s financial resilience.”

“The Woolard Review warned that people can borrow without understanding what they’re getting into, or indeed appreciating that they’re borrowing at all. They can also borrow without any assessment of their credit worthiness and with inconsistent credit reporting, which means they can run up multiple debts to unaffordable levels, without anyone joining the dots. One bank told the review that one in ten of its customers who had these deals were already in arrears.”

“This was reflected in the Which? research today that found people thought of Buy Now Pay Later as budgeting solutions rather than credit. They didn’t read the terms and conditions and were more likely to buy things they didn’t need or couldn’t afford.”

“If people run into trouble, they don’t have the same protection as regulated borrowing, so if you struggle to repay, you’re subjected to whatever approach the company chooses. If they treat you harshly, the Ombudsman can’t step in and protect you from being hounded or treated unfairly.”

“Consultation was clearly vital, because the government is keen not to destroy the market by regulating too harshly. If people understand what they’re getting into, and can afford repayments, it’s a useful way of spreading the cost without charge. It can be far more cost-effective than the alternative of expensive credit or store cards. However, the government can’t afford to drag its feet in putting regulation in place, because with every passing month, millions more is borrowed, and millions more borrowers are put at risk.”