Access Credit

Is It Now too Easy to Access Credit?

Buy now, pay later (BNPL) is the latest financial loan scheme to come under government scrutiny. Its use in the ecommerce sector has blossomed, particularly over the past two years. Unfortunately, this has resulted in more people falling heavily into debt. Yet, despite this, an increasing number of companies are signing up for it.

The scheme works by splitting the cost of payment for goods into separate dates. Consumers are offered the opportunity of paying an instalment when they buy, then spreading the cost over various future dates. To choose this all the consumer has to do is click on the option at the online checkout. And it’s not only online stores that are offering BNPL schemes – many physical stores are doing the same.

Big players in the industry include Swedish company Klarna and UK-based Clearpay. Klarna offers a ‘pay in three’ option over several months, while those who sign up to a Clearpay scheme pay in four instalments, every two weeks.

Companies who use these systems are well-known household names, such as ASOS and John Lewis. That’s not surprising since Klarna says it works with 22,000 companies in the UK alone. But it’s not only clothes or furniture retailers who offer BNPL – Microsoft has signed up to it and Apple offered it in the States earlier this year.

Rise in number of consumers missing BNPL instalments

Last year consumers spent more than £5.6bn using BNPL scheme between January and June last year. The previous year it had taken until October to reach that kind of total. This was revealed in a study by credit reference service Credit Karma. They also found 41 per cent of consumers missed a payment in 2022, compared to just 11 per cent the previous year.

But the genius of the schemes is that they are easily accessible. There isn’t the same level of strict financial checks that are imposed on more established online loan products. It’s no surprise then that a review by the Financial Conduct Authority (FCA) found that around 75 per cent of BNPL customers were aged 36 and under. Most are female – believed to be due to the huge number of female online clothes, accessory and homewares retailers which have adopted the scheme.

Sue Anderson, head of media at the UK debt charity StepChange said: “The idea that something expensive becomes affordable if paid for in instalments is quite a powerful message.

“Companies that offer BNPL products to retailers claim consumers are more likely to buy something and spend more, and less likely to abandon their online shopping basket.”

The charity discovered that 87 per cent of people who took out a BNPL loan were also in possession of at least one other consumer debt. Nearly one fifth – 17 per cent – were regarded by Step Change as being in ‘severe financial difficulty.’

Debt charities worried supermarkets also using BNPL

Staff at Citizens Advice are similarly concerned. They revealed that 42 per cent of people who had recently paid with BNPL had paid off instalments using credit cards or by borrowing from other sources.

What is even more concerning, say critics, is that BNPL schemes are also being offered by supermarkets and utility providers.

BNPL Legislation due next year

It’s hardly surprising then that debt charities, economists and some politicians are calling for regulation of the BNPL sector. The UK Treasury has produced draft legislation. This was following a consultation in 2022. It includes FCA Authorisation for BNPL providers, as well as restrictions on marketing ads for firms who aren’t currently FCA authorised. The legislation is expected to come in to force in 2024.

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