Which? is calling for Buy Now, Pay Later (BNPL) firms like Klarna and Clearpay to be fully regulated to provide greater protection for consumers, as new research from the consumer champion finds concerning industry practices encourage people to spend more than they planned to.
The consumer champion’s findings show that these slickly designed, easy-to-access credit products are encouraging impulse buying, with nearly a quarter of BNPL users (24%) saying they spent more than they planned to because BNPL was available.
With one in ten (11%) BNPL users reporting that they have incurred late charges when paying this way, Which? is concerned about the dangers involved with this growing form of unsecured credit, particularly when the risks are not always made clear, and is calling for the financial regulator to be given new powers to fully regulate the BNPL industry to prevent consumers from being harmed.
The research suggests pushy marketing strategies, combined with sales features that make payment easier – such as ‘express checkout’ services on some retailers’ websites – could be driving people to overspend and leading to people falling into debt, a concern also shared by debt charities such as StepChange.
Which? also found that a quarter of BNPL users (26%) said they had not planned to use this type of payment option until it popped up at checkout, while two in ten (18%) said they used BNPL because they were offered a discount to do so.
One in ten (13%) also said they used it by accident because it was selected as the default payment option at checkout. One survey respondent said: “I was tricked into [using] it because the box was already ticked”.
BNPL firms also advertise heavily on their partners’ websites. Which? looked at 80 of these sites and found the largest BNPL ads take up as much as 80 per cent of the screen, with fashion retailers most likely to carry these prominent ads.
These factors are evidence of the firms’ application of consumer psychology to drive sales, a strategy one BNPL provider has promoted to its retail partners.
In 2017, Klarna, one of the leading BNPL firms in the UK, commissioned a study with the University of Reading into online shopping behaviour. The report, intended for partner retailers, explains how to design ‘customer journeys’ that will persuade people to make ‘emotional’ purchases instead of ‘logical’ ones.
However, as Which? research shows, these frictionless customer journeys can lead to shoppers spending more than they can afford, without necessarily being aware of the risks.
41 per cent of people in the Which? survey who were aware of BNPL either did not believe or did not know that missing a payment could lead to the BNPL firm passing your debt on to a debt collection agency.
As a result of its findings, Which? is now calling for providers of this type of BNPL service to be regulated by the Financial Conduct Authority.
In its submission to the regulator, the consumer champion said that, while supportive of innovation, it believes that the BNPL market must have consumer protections in place in line with other regulated unsecured credit products.
Giving the FCA the powers to regulate the BNPL market would allow it to more effectively monitor how BNPL firms treat consumers, and if necessary, take action to prevent consumers from being harmed.
Jenny Ross, Which? Money Editor, said “While Buy Now, Pay Later services offer speed and convenience at the checkout, our research shows their design makes it far too simple for shoppers to spend more than they were intending.”
“This could lead to people building up debts that they may struggle to pay back, which is particularly concerning if they don’t understand the risks of using this type of product.”
“Given that many people’s finances are stretched now more than ever, we believe that the FCA needs to regulate this market to ensure consumers are not harmed and that action can be taken if these firms are treating customers unfairly.”
Separately Money expert Martin Lewis is all pressing for regulation of buy now, pay later firms. Lewis told MPs in a House of Commons select committee hearing that regulation was urgently required.
Earlier this week, Lewis warned MPs on the Treasury Select Committee of an ‘explosion’ of buy-now, pay-later companies which he said were targeting the under-30s and getting them into debt.
Lewis said “It is absolutely the fastest-growing form of credit and it is targeted at the under-30s. And if you forgive me, most policymakers are not under 30 and it has gone under the radar.”
“Advertising is done by influencers on Instagram, where they are pushing the feelgood hashtag Klarna. That is fundamentally inappropriate for a credit product. My issue is that, just like with payday loans, it will be too late. It is unregulated, without controls both in product design and communications. When people have a problem – and often it actually works pretty well – there is no ombudsman you can go to, because it is unregulated. I would call for maximum speed to move this into the regulatory environment.”
Klarna’s UK Country Lead, Alex Marsh said “Regarding targeting under-30s, this is inaccurate. Klarna is aimed at anyone who values convenience and who wishes to spread the cost of purchases, without incurring any fees. The average age of a Klarna customer is 33 and our fastest-growing demographic is Gen X – those aged between 40 and 54.”
“Klarna is a fully licensed bank operating at a high standard, but that this is not true of everyone in this sector”. ‘
“Klarna fully supports appropriate regulation and that it has been engaging with the FCA on the topic.”