Is Eat Now Pay Later a step too far?

As Deliveroo announced their partnership with Buy Now Pay Later (BNPL) giant Klarna, allowing customers to pay for their takeaway food deliveries in instalments, we ask whether Eat Now Pay Later is a step too far? Are BNPL products simply exacerbating consumer debt and encouraging people to live beyond their means, or is this a savvy new way to manage your finances?

What is BNPL?

BNPL is the fastest growing online payment method in the UK, with 44% of consumers in the UK currently making use of them according to finder.com.  BNPL products have a growth rate which is twice that of bank transfers and more than triple that of digital wallets. In simple terms, BNPL companies allow consumers to delay or split their bill into instalments, offering interest free payments. BNPL can offer these split payments interest free by passing on the cost to retailers, who pay them a fee. In an increasingly saturated online retail market, there has been a rush to offer this to consumers. The two biggest BNPL firms, Klarna and ClearPay, now work with over 2,000 retailers between them.

Most BNPL providers also offer other credit products.  Klarna, for example, has a financing option with repayments spread over 6 months to 3 years. The products offered by each of the providers differs, but each follows the same principle - offering customers a chance to delay their payments or pay in instalments, interest free.  As the “Eat Now Pay Later” example shows, BNPL is not reserved for high value purchases but for everyday items and services.

Sounds good so far, what’s the problem with BNPL?

As BNPL products are generally offered interest-free, they are not currently regulated by the FCA. Although instalment or delayed pay is interest-free there will often be late payment charges. In fact, a recent report published by www.money.co.uk suggests that 1 in 10 BNPL users are currently being chased by debt collectors and over £39 million is owed in late payment fees.  The younger generation is also “vulnerable” to BNPL as much of the marketing of their products is aimed at them, with around 54% of millennials currently using one or more BNPL product according to finder.com. Online purchases bring with them the expectation of immediacy and BNPL plays into the ”why wait” mentality by offering goods and services immediately, before many have carefully considered whether they can afford to make the purchase.

Using BNPL also means that consumers will effectively lose their Section 75 consumer protection which is a guarantee when using a credit card for purchases over £100.  If the goods are faulty or don’t get delivered, you’re protected. BNPL essentially muddies the water as the direct link between retailer and consumer is broken, with the introduction of a third-party processor.  Buyers will need to check what protection they get via BNPL or go direct to retailers where possible.

BNPL companies have also come under criticism for not carrying out stringent credit checks and affordability evaluations. This means that consumers often use several different providers concurrently and get themselves further and further into debt.

The convenience and simplicity of using BNPL means that many consumers don’t read the small print and don’t see it as a form of credit in the same way they would when using a credit card. Consumers can get stung with fees if they don’t make payments on time.  The amount depends on the provider but could be as much as 25% of the initial purchase price. The remaining balance could also have interest applied and any default could be reported on your credit file.

Is BNPL Regulation on the way?

The Woolard Review, presented to the FCA in 2021, gave an in-depth overview of BNPL products as well as other unsecured credit products. Its summary recommendations include the following:

• New credit products that are currently unregulated need to be brought within the regulatory framework as a matter of urgency.
• The economic effects of the pandemic will drive demand for debt advice. A well-functioning debt advice sector is essential to support a healthy credit market.
• For the good of consumers and firms there needs to be a more ‘outcomes focused

approach’ to regulating the credit sector that looks at how products are used in the

real world and consistently regulates on that basis.

• Regulation should focus not just on affordability, but also on conduct across the lifetime of the product. Learning from the experience of Covid-19, there should also be a more consistent approach to forbearance across firms.
• Greater emphasis needs to be placed by the FCA, the government and

other stakeholders, on ensuring a holistic approach to key issues.

The full report can be accessed here.

ClearPay, Klarna, Laybuy and Openpay, as some of the most active operators in the market, have been working alongside the FCA to make their services and their terms of use more transparent ahead of official regulation.

Conclusion

Taking all the above into consideration, it is advisable to exercise caution when using BNPL products. Whilst they are convenient and can offer consumers instant access to credit, they can also cause people to overstretch themselves and get into debt. Once these products come within FCA regulation there should be more visibility around the risks of late payments and more rigorous affordability checks will be in place to avoid unsuitable lending to vulnerable customers.

In the meantime, it is important to assess whether you can afford to make the purchase, now or in the future, and budget accordingly.  The use of BNPL products, especially upon default, could have a negative impact on both your credit score and your future ability to apply for a mortgage or business loan.