Buy now Pay later (‘BNPL’) providers like Klarna and Clearpay allow customers to purchase goods in a series of instalments, without the fear of crippling interest rates or a late payment fee. Yet, the appeal of such an offer can often mask the reality that it is in fact, a form of credit. An unintended consequence of this kind of arrangement is that it encourages users to purchase items they cannot afford – at least, at the time – and in doing so, could cause them to overestimate their purchasing capacity and accumulate debt.
Until now, BNPL loans have not been considered a loan at all – alleviating the BNPL firms of regulations you might expect from more typical loan agreements. Chris Woolard, who led the FCA review recommending regulation, said that although buy now, pay later was convenient for some people, for others it was far too easy “to fall into problem debt”. Adding to this, Economic Secretary to the Treasury John Glen comments: “By stepping in and regulating, we’re making sure people are treated fairly and only offered agreements they can afford – the same protections you’d expect with other loans.”
The issue of transparency is a key one and the lack of consumer education has been a source of criticism before. When shopping online, as users select their method of payment, the BNPL option is indistinguishable from the rest. As firms look to social media advertising and celebrity endorsements, there is a sense that the undertaking responsibility associated with debt is being lost. In particular, Klarna have featured rapper and investor Snoop Dogg to showcase how ‘smooth’ they have made the payment process, appealing directly to their younger audience – 75% of whom, are under the age of 36 and 50% under the age of 24. Whilst total debts are not huge, risks of unaffordable borrowing remain ever-present within this demographic.
Whilst still insisting on the importance of flexible payment options, BNPL providers have welcomed the prospect of new regulations with open arms, publishing this statement: “At Klarna we support regulation of the sector and look forward to the recommendations of the Woolard review.” Ultimately, it is difficult to predict how these regulations might change the way BNPL schemes have been known to operate; but it remains vital for them to consider ways to ensure the credit relationship is crystal clear and should continue to work with retailers to do so.