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The UK consumer association warns that using buy now, pay later (BNPL) to pay for basic food shopping could be a sign of problem debt.
BNPL provider Zilch has recently hit the headlines with its advertisement promoting BNPL for buying a pizza, representing a potentially marked shift in how consumers are being sold BNPL.
BNPL firms have typically marketed their offers as a convenient means to make one-off purchases for fashion and other small luxuries.
A Klarna spokesperson recently told VIXIO: “While people are shifting away from credit cards, there are still times in their life when they need access to credit. Instead of always on credit, it is more episodic — used for single items.”
However, as the market has grown, an increasing number of firms are now looking at new opportunities to expand their offerings to more everyday spend.
At the same time, BNPL firms have innovated their products so that consumers can take advantage of this deferred payment option even if the retailer used has not signed a partnership agreement with a BNPL provider. This means that consumers can use BNPL for any product or service they wish to, either online and in some cases in store.
Previous Which? research found that many BNPL users do not perceive these schemes as credit, instead they see them as a way to pay or a money management tool.
As long as BNPL was an alternative method to pay for higher value, one-off purchases there is a level of consideration that goes into each purchase decision that suggests a relatively normal functioning market.
However, with BNPL now being promoted to be used for basic necessities, it has raised alarm bells with experts.
“A common indicator of problem debt is a client borrowing to pay for essentials like food, so parts of the industry now promoting buy now, pay later credit for grocery shopping is worrying,” the consumer body said quoting Richard Lane, director of external affairs at StepChange.
Looking at Trustpilot reviews on Zilch, Which? found dozens of app users citing their poor financial situation as a reason for using Zilch to pay for orders with UK supermarkets.
By marketing BNPL as an option to pay for food, these firms are potentially targeting low-income and vulnerable consumers struggling with the rising cost of living.
“For people struggling to pay the bills, using credit as a safety net has its advantages — but it can easily make your financial problems worse,” the association warns.
“If people cannot afford to pay for food without borrowing, then credit may simply exacerbate the problem and postpone the point at which it gets addressed,” Lane told the consumer body, stressing that “it may be a debt solution rather than more credit that people really need”.
At present, BNPL products largely fall outside the scope of UK regulations. As a typical interest- and fee-free product that is repayable within 12 months, BNPL is currently not subject to the oversight of the Financial Conduct Authority (FCA).
As usage has soared over recent years, the government has committed itself to legislate BNPL.
However, this does not appear to be the end of the story. While the future legislation is shaping, BNPL firms and credit institutions are fighting a war of narratives regarding consumer detriment and which products need to be further regulated.
Last week, research commissioned by Klarna and Fairer Finance found that six out of ten credit card users do not know how much interest they are charged, and called on the FCA to urgently address and replace rules to ensure consumers can easily understand what they are signing up to.
Seemingly in response, Barclays published its own survey study on Monday (February 14) revealing that a quarter of BNPL users are concerned about their ability to repay their BNPL bills and over a third used BNPL because they did not have enough money on their account. The bank urged the government to adopt “consistent and tougher regulation of the sector”.
