Buy Now Pay Later providers cause concern across UK as debt rises

Increased scrutiny is being placed upon the UK's growing use of Buy Now Pay Later (BNPL) services. Multiple investigations have revealed a developing pattern reflecting that as these trendy lenders continue to grow in popularity, as does the amount of debt racked up by poorly informed consumers.

The growing levels of debt being created by these payment services has led to calls for BNPL providers to take on more responsibility in their evaluations of who should be accepted for their lending services.

"Increasing number of concerns being raised"

Research has shown that the BNPL lending services are particularly popular among the younger age group, with Generation Z reported to have racked up some serious debts through the use of BNPL providers such as Klarna, Laybuy and similar providers.

Financial campaigner, Alice Tapper, said that she had received hundreds of messages from distressed young people, particularly in lockdown, with one in six 18 to 24-year-olds having turned to buy-now-pay-later services. One user as young as 16 was able to bypass one provider's website security and credit checker and land herself in hundreds of pounds in debt.

This mounting problem was bought to the attention of Labour MP Stella Creasy, who has now written to the Financial Conduct Authority and the Advertising Standards Authority to raise the issue of BNPL. Stella Creasy previously campaigned against pay day loaners Wonga in 2014, which led to the FCA, the financial services industry watchdog, investigating Wonga and forcing it to write off 330,000 loans worth £220m and compensate 45,000 other customers. That Stella Creasy is now identifying similar issues with BNPL providers should certainly raise concern.

The increasing number of young shoppers getting into large amounts of debt arising from BNPL services has also led to a rallying of debt charities making their support available to shoppers. Debt charities including Stepchange, the Money Advice Trust, the Debt Support Trust and Christians Against Poverty are calling on BNPL firms to better explain the risks to customers' finances in their adverts. Stuart Carmichael, chief executive of the Debt Support Trust, described some BNPL adverts as "misleading".

While there is evidently an increasing number of concerns being raised, a major issue with some BNPL providers such as Klarna, is that they are not authorised by the UK's Financial Conduct Authority (FCA) but use "passported" permissions from their own countries to operate in the UK. While Klarna is regulated by the Swedish Financial Supervisory Authority, Alice Tapper has called for all BNPL products to be regulated in the UK. On Klarna's pay-later products, there is no legal compulsion to include risk wording on adverts and at checkout and accordingly she observes there is therefore "no counter balance to this genius marketing".

The growing impact on UK shoppers

The growing demand for online products and services has fuelled a rapid increase in the use of BNPL providers. Only last year, Klarna became one of the largest fintech start-ups in Europe after a new funding round valued the Swedish payments group at $5.5 billion.

The lack of UK oversight combined with the fast growth of BNPL providers has resulted in numerous instances of confusion over consumer credit checks and fees, potentially leading to long-term impact upon an individual's ability to borrow in the future where they get into arrears now.

With the level of complaints about BNPL providers having greatly increased during the lockdown, Klarna - which has eight million customers in the UK alone - responded to the growing debt crisis. Klarna's vice president, Luke Griffiths told the BBC "Obviously with people's financial circumstances changing during this period, we have constantly reviewed our policies around the type of customer that we accept". He then went on to say that the firm is only accepting customers who it believes will and can repay on time.

Encouraging responsible lending

With high levels of customer confusion leading to growing consumer debt it is evident that BNPL shopping is not sustainable and that something must change in the way money is loaned. Growing concern among an array of stakeholders begs the question as to whether buy- now-pay-later providers will be forced to face repercussions for the debts arising. Might this lead to a repeat of the Wonga situation, with firms facing fines for providing access to credit that consumers cannot afford to service or repay?

Some debt charities argue that it is the retailer's responsibility to educate their customers of the risks being undertaken when committing to any BNPL payments. Although with impulse buying being popular among many Gen Z's and Millennials, it is questionable if any attention will be paid to prior warnings made by the retailer. But it should also be recognised that in many cases the retailers may not understand the product sufficiently enough to fully and correctly educate their customer.

It is evident that all BNPL providers operating in the UK should be regulated by the FCA and ASA in line with existing UK based providers and that retailers require the necessary support and education regarding BNPL products and the potential risks to their customers.

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