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A senior member of the UK’s parliament has underlined the risks that buy now, pay later (BNPL) products pose for consumers as the country prepares for its first post-lockdown Christmas holidays.
BNPL products have fast gathered momentum in recent years, becoming a popular product with both merchants and consumers.
An estimated 10.1m people used BNPL products in the UK in 2020, with the number of users growing by 70-80 percent from the prior year, according to research by Bain & Company in October this year.
Yet the success of BNPL products has simultaneously seen regulators and governments begin to weigh up the risks that come with such products, particularly with Christmas just around the corner.
It is a revolution in how people get credit in this country and it has gone relatively unnoticed, said Stella Creasy, a Labour Party MP, in a debate at the Houses of Parliament.
For Creasy, this is not good news.
“I very much believe that BNPL companies could become the true villains of this Christmas, rather than Scrooge or the Grinch,” she warned.
Debt has become a lot worse during the pandemic, said the MP, who has previously gained a reputation for her campaign against payday loan companies, such as the now-defunct Wonga, which ultimately ended in it becoming more tightly regulated.
“And for many, hard for them to ever get out of. An awful lot of people are drowning not waving.”
When we talk about consumer debt and consumer credit, many people are vulnerable anyway because they have long-standing household debts, said Creasy. “Those debts have been made a lot worse, and into that mix, we are now expecting people to help spend money and get the economy back on track.
“This could lead to real poverty and destitution for many,” she said.
What is more, the government should set out, in the coming days and weeks, exactly what they are doing to ensure people know what they are signing up for when they take out a BNPL product, said Tulip Siddiq, a fellow Labour MP.
When approached for comment by VIXIO, a spokesperson for Klarna said: “during the holiday season, and all year long, in fact, consumers are choosing BNPL services like Klarna, with no interest and no fees, over alternative higher-cost options such as credit cards, with extortionate interest and dirty tricks like encouraging minimum payments to keep people in debt.”
In fact, the research by Bain & Company shows that although 62 percent of credit card users surveyed were charged late fees, 0 percent of Klarna users were.
“We make it clear at the checkout, in our Ts and Cs and wherever a consumer is using our products that we are a form of credit and that there are consequences to missed payments,” Klarna’s spokesperson added. “However, we charge no interest or fees to consumers in the UK and our BNPL products do not affect consumers' credit scores.”
The e-commerce revolution
The change with people shopping online is not going to go backwards, warned Creasy, continuing that a silent minority of people are struggling to pay off their debits post-pandemic.
Discussing payday loans, which are now capped, the MP said that although BNPL firms would say that this is a case of comparing apples and oranges, both are a form of high-cost credit. “Which they are, as there are high late fees if you don't pay them back.”
“They share a similar marketing tactic, which is about forming a habit, which is about getting people to see them as the main way for people to make ends meet,” she said. “They make you think that this is the way you deal when you have too much month at the end of your money.”
For Creasy, how these companies make their money is simple. “Suddenly, when a £100 pair of trainers only costs £25, you think, well, I might buy the trousers, and the jacket to go with it.”
This makes it worth it for retailers, she continued, noting that consumers are likely to spend more.
As these companies rely on merchant fees, it is not about the consumer but instead the retailer and what you can get out of the retail.
'Critical' time for regulation
“Consumers don’t realise that unlike other forms of credit, there is no regulation on these loans,” said Creasy.
In layman's terms, if you get into difficulty, you can only appeal to the company themselves to treat you fairly, she warned. “Good luck with that.”
Unlike other products, consumers in the UK are so far unable to appeal to institutions such as the Financial Ombudsman, as is the case with payday loans and credit cards.
Klarna’s spokesperson told VIXIO that the company agrees that BNPL needs to be regulated, confirming that ongoing dialogue with the Treasury to ensure regulation protects consumers regardless of the payment option or provider they choose to use.
“I’m keen to see that so many BNPL firms are falling over themselves asking to be regulated,” said Paul Maynard, a Conservative MP.
Of course, once they see the detail, they may not be so happy, he warned. “The test of the BNPL sector is not their good intentions now but actually what they make of it at the end of that process.”
However, relative less well off consumers should not be denied access to short-term, low-cost credit that richer consumers take for granted, he continued.
It is welcome that a consultation has been published, Creasy said, referring to the Treasury’s new consultative document. Yet, it comes many months after the Woolard Review.
“These companies have known that regulation is coming, yet have had no clarity to what that regulation might be or, crucially, when it might be enacted,” she warned, adding that it is little wonder that many consumer groups are very, very worried.
The length of time that it is taking to regulate offers companies an open goal, Creasy cautioned. “There are now betting sites with a BNPL option.”
“We will all pay the cost if the government is slow but fintech is quick,” she said.
The UK government’s consultation is now open until January 6, 2022.
Although it does not come to the conclusion of the Woolard Review, that consumer detriment is widespread, it does conclude that there is an urgent need to put BNPL in scope of the rules that it is currently exempted from.
A key theme of the consultation is the amount of pre-contractual information that is disclosed.
Here, the Treasury has concluded that Consumer Credit Act (CCA) rules governing disclosure to borrowers are not adequate for BNPL, considering consumers enter into BNPL agreements online with much more regularity than traditional, and often higher-value, credit products.
The consultation suggests mandating the Financial Conduct Authority (FCA) to establish more limited disclosure standards for BNPL products than those applying to other consumer lending rules under the CCA.
The Treasury consultation paper also looks at creditworthiness assessments for purchases made with BNPL products. These are currently regulated by the FCA, meaning that providers do not have to conduct credit assessments of either new customers or for individual agreements.
Therefore, the Treasury has concluded that BNPL regulation should include the application of the FCA’s current rules on creditworthiness to BNPL agreements, noting that concerns have been raised about the unclear or inconsistent use of credit reference agencies by sellers offering BNPL options.
“The sector needs to be regulated so high standards and protections are consistently applied across all providers,” said Klarna’s spokesperson. “This is especially as more traditional banks, who have a long history of using dirty tricks to bury their customers in debt by charging double-digit interest, enter the space.”
Done well, regulation of the BNPL sector will protect consumers, promote competition, mobility and choice, and position London as a world leader in financial innovation post-Brexit, said the spokesperson.
“The alternative is that regulation is used as a tool by the old banks to lock customers into paying high interest and hidden fees and consumers will continue to lose.”
