If you’ve been shopping for summer sale bargains online lately, you’ll have come across the tempting opportunity to buy now, pay later – splitting the cost of that must-have item into several repayments, usually over a few weeks.
It can feel like a win-win – it’s interest free, at least upfront, because the business model of firms such as Klarna and Clearpay, which have expanded rapidly in the UK, is to charge the fees to the retailer rather than the customer.
But miss a repayment, and you’ll be charged a late payment fee. Default altogether, and you’ll be handed over to a debt collection agency.
Even before the cost of living crisis, charities and debt campaigners were sounding the alarm about the risks of this form of borrowing, and they have expressed fears that consumers use it not just for occasional treats, but for day-to-day essentials.
Citizens Advice has described buy now, pay later (BNPL) as “like quicksand – easy to slip into and very difficult to get out of”. Its latest cost of living tracker showed one in six people using this kind of borrowing were struggling with repayments.
Yet it goes completely unregulated by the Financial Conduct Agency (FCA), which is meant to protect consumers.
And many campaigners now fear that, as Sky News reported last month, the Treasury is preparing to shelve long-promised plans to bring BNPL under the wing of the City watchdog.
It has already been two years since the Treasury first announced its intention to regulate.
That followed an FCA review which pointed to problems, including poor consumer understanding, a failure to make affordability assessments and “inconsistent treatment of customers in financial difficulty”.
The BNPL lenders themselves are unabashed about their impact on consumers’ behaviour – the prospect of spreading the cost, tends to make us spend more.
Australian firm Clearpay boasts, in online marketing material aimed at UK retailers, “our merchants see basket sizes up to 50% higher in value than before Clearpay”.
Is that because shoppers are able to use BNPL to manage their outgoings so smoothly that they feel empowered to splash out? Or could it be that it’s tempting some to buy things they can’t really afford? Klarna describes itself as “keeping people out of debt,” because of its approach of charging zero interest.
Sceptics include Labour MP Stella Creasy, who previously fought a lengthy battle against the practices of payday lenders including Wonga, which ultimately collapsed into administration in 2018.
The FCA has made its own position crystal clear. Managing director Nikhil Rathi told the Treasury select committee last month that there was “harm accruing” all the time BNPL continues to operate without consumer regulation.
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He cited estimates that one in 10 consumers who use it end up in the hands of debt collectors, and insisted the FCA is “ready to go” in supervising the sector.
A recent joint letter from campaigners – whose signatories included consumer rights expert Martin Lewis and the chief executives of Citizens Advice and Which? – warned “we are particularly concerned that those already struggling to make ends meet are most likely to use BNPL because there are currently no safeguards in place to prevent people already grappling with debt to sign up”.
Sector experts believe the sudden roadblock at the Treasury is the ardently pro-business City minister, Andrew Griffith, who may have been swayed by warnings from the sector about the risks of a heavy-handed approach.
A former chief financial officer at Sky, Griffith lent Boris Johnson his £9.5m townhouse as a leadership campaign base in 2019, and is on the record as wanting to scrap inheritance tax.
Speaking at a dinner for financial sector lobby group City UK earlier this year, he toldbankers he wanted to work “hand in glove” with them, “to remove friction, to support and celebrate risk takers and to shape regulatory frameworks that are well-regarded but agile”.
Griffith himself was agile when it came to bashing the exclusive private bank Coutts on behalf of rightwing loudmouth Nigel Farage. Debt campaigners now rightly want the Treasury to take an equally nimble approach on behalf of cash-strapped consumers using BNPL just to get by.
