The way we shop, communicate and interact is evolving and it can be hard to immediately spot the potential pitfalls. Particularly when a new service comes along that is both very popular with consumers and heavily invested in by the industry, as it means a rapid rate of adoption and growth.
While I do have some sympathy for the law makers, regulators and the Government organisations trying to keep up, we all know they don’t move fast at the best of times. But do they listen well enough to those canaries in the mine that can tell them when there’s a big problem brewing?
I’m seeing this acutely with the explosion in cases about ‘buy now, pay later’ credit and I would say the warning signs aren’t yet being properly heeded.
What is ‘buy now, pay later’ credit?
Buy now, pay later credit (BNPL) is one of the oldest forms of credit available to people in the UK, going back several decades before the Financial Services Act came into force in 1988.
BNPL emerged through catalogues and with high-street retailers who realised they could incentivise shopping by splitting the payments of expensive, often essential, items into instalments. The added incentive of an interest free period also helped to convince many wary shoppers to go ahead. If you paid off the deal during this timeframe you just paid the price tag, and you were unusual. If you went over, however, you could expect to pay up to 40% interest on the original cost of the item.
However, with the rise of online retailers and the emergence of new retail models, this form of credit has been ‘reimagined’ and repackaged. It’s now often promoted as more of a lifestyle choice, often for fast fashion, rather than a high interest credit contract with penalties for defaulting.
These ‘options’ have always been controversial and polarising, with some arguing nothing in life is for free and we all ought to be able to work out what we can afford. The problem with this argument is that this form of credit cleverly preys on a number of our consumer biases; we are inherently a positive bunch who think we will be able to pay off that item on time (even when there’s good logic and evidence to the contrary) and, perhaps more worryingly with this new version of the credit, is that it’s being normalised, appearing nonchalantly as just another payment option for often smaller, non-essential purchases.
I think we all ought to be additionally alarmed when, because of the uptake in a high number of younger fashion focused stores, this product is probably being taken up by those that could be considered as being susceptible to the idea that it’s a lifestyle option – potentially because of their age or their income. Because in practice, we all know most people who use this type of credit people fail to pay on time – and pay a higher price.
How do Klarna and Clearpay fit in to this?
For clarity, here’s how they work. Clearpay is a new entrant into this market. You pay for goods in four fortnightly instalments which are interest-free if paid on time.
With Klarna, customers have different payment options. Paying in three instalments (automatically taken every 30 days) is interest-free if you meet the payment dates, as is financing, where payments are spread over a longer period (usually up to 36 months). But charges and interest apply if you default on payments.
The more controversial option is to pay in 30 days. This works on the basis that you might try before you buy then return an item (as many retailers sell this form of credit), but at the 30-day point you’ve bought the goods if you’ve not returned them. What happens if you’ve not received them? Or retailer terms give you longer than 30 days to get something sent back?
So what’s the problem?
Just to give you an idea of how popular BNPL credit now is, in just a short time, millions of people have signed up to these types of new payment deals. Alarmingly, Resolver has received 15,950 complaints in less than two years. Looking at these more closely reveals stark warnings of the potential disasters ahead.
Complaints relating to charges and fees make up around a third of the total. Not quite as prolific but still enough to cause concern is that we are seeing complaints about debt or arrears problems and payment issues.
This ‘new’ style of BNPL is complicated because it is both regulated (where you are charged interest) and unregulated (where no interest is charged). So, the deals are hard to understand and keep on top of – and all have consequences if you don’t pay on time. I also have concerns that this form of credit is unregulated in part and is sold as a ‘lifestyle’ choice because with a lack of regulation comes a lack of consumer protection.
Some of the unregulated services offered by these systems may not charge you interest or register a black mark on your credit report, but our users tell us they’ve been passed to debt collectors after getting into difficulties. So long after your fast item has expired you’re now facing a pretty grim set of choices.
The way BNPL is set up means it’s up to retailers to explain how it works and include warnings on their sites – yet these are often deeply inadequate. It’s also hard to find out what happens if you fail to pay, even on the websites of these credit companies. I always think it can only lead to poor consumer outcomes where everyone involved in a transaction considers themselves the ‘third party’ in the arrangement. It seems to me this is very much the case here.
A final warning
It’s recently come to our attention that some banks and merchants that provide transaction services are treating the interest-free payments as cash advances on cards. This may mean that people are charged a fee for paying in three interest free chunks, for example. Great, another credit balance to manage.
As a nation, many people need helping out of debt, not an opportunity to sleepwalk into further trouble. I’ll be campaigning for more transparency in this sector and greater regulation. But in the meantime, be careful, and please don’t buy now and pay for it later…