It’s not as if split payments are a new idea, and at some point in their lives most people have had to scrape to make do, perhaps via a loan from a family member or by sticking that week’s grocery shopping on a credit card. But growing concern about the rapid rise of buy-now pay-later (BNPL) has finally prompted the publication of draft legislation to bring what some have called the “wild west of lending” under regulatory control in the UK.
The announcement last week came almost two years to the day after the government first stated its intention to put interest-free BNPL purchases facilitated by tech platforms such as Klarna, Zilch, Laybuy and Clearpay under the purview of the Financial Conduct Authority (FCA). The ensuing eight weeks of industry consultation is taking place as growing numbers of consumers turn to BNPL to help make ends meet while inflation continues its double-digit rampage.
The industry’s proponents reasonably argue that against this backdrop, it has never been more vital that people have access to interest-free credit. BNPL has no doubt been a lifeline for those who might otherwise resort to far more expensive payday lenders – or worse.
Since its initial inception in 2014 in Australia, the BNPL industry has fashioned itself as the consumers’ saviour from credit card issuers who earn the vast majority of their revenues from fees and interest charged to users who don’t pay off balances in full and on time.
The issue is that the technology has now become embedded within many online websites and shopping apps to the point that almost any financial transaction can be turned into an instalment arrangement with a few clicks of a button. Critics are concerned that these arrangements encourage people not to think too hard about the fact that they’re getting into debt, and what the potential implications might be.
Labour MP Stella Creasy has been campaigning for years for more stringent oversight and warned last week that urgent action is needed “before these legal loan sharks become the next Wonga-style scandal”. Her cross-party amendment to the Financial Services Bill would have introduced buy-now pay-later regulatory legislation within months had it not been voted down in January 2021.
Matthew Upton, director of policy at Citizens Advice, agreed that the current consultation has been a long time coming.
“Buy-now pay-later borrowing can be like quicksand – easy to slip into and very difficult to get out of,” he said last week. “As living costs continue to spiral, we know some people are using it to simply make ends meet, without being fully informed about what they are signing up to or properly protected.”
READ MORE: Buy now, pain later as BNPL industry gets set for its first economic downturn
Responsible Finance, a trade body that promotes affordable lending, said it has come across cases where regulated lenders such as banks and credit card providers have received applications from people with as many as 30 outstanding BNPL loans. In addition, many have “low awareness” of the consequences of missed payments.
In August of last year the FCA warned buy-now pay-later platforms about following the rules on financial promotions after discovering social media posts that failed to highlight the consequences of non-repayment. Earlier in the year the financial watchdog also ordered providers to change their contracts after identifying potential harm to customers.
In both instances the FCA had to use consumer rights law to force action. The regulator would have direct enforcement power under the new proposals.
This would include the ability to block future lending by buy-now pay-later providers that do not follow the rules for assessing a customer’s creditworthiness. Lenders will also have to provide customers with more information about their loans, and customers will be able to bring complaints against BNPL companies to the Financial Ombudsman Service, which adjudicates on consumer disputes.
Would all consumers necessarily welcome this? Possibly not. Younger people with limited credit history and those with poor credit track records are among the biggest users of these services.
According to the Centre for Financial Capability, 51 per cent of those aged 18-34 in the UK have used buy-now pay-later, versus 20% of those over the age of 65. However, both figures were up by some 40% on a year earlier, with more than a quarter who have or who intend to use BNPL citing inflation as their primary motivation.
Credit reporting agency Equifax says a third a all UK adults have used BNPL at one time or another, including 4.1 million people who took out such loans for the first time last year. Of that total, an estimated 12% used it to pay for groceries and other essentials.
READ MORE: Energy firms accused of gouging customers to create record profits
There seems little doubt BNPL has had a hand in propping up consumer spending as the cost-of-living crisis has come to bear, with official figures at the end of last week showing a surprise 0.5% increase in UK retail sales volumes during January.
The rise was beyond the expectations of analysts, who had predicted a 0.2% decline, as online retail led the way with a 2% increase to account for a quarter of the overall take. According to separate figures from Adobe Analytics, BNPL financed nearly £1 of every £8 spent online in the UK during January.
With growing prevalence it’s little surprise there has also been an increase in formal grievances against the industry. A Freedom of Information request made public yesterday by lending firm Creditspring showed that complaints to the Financial Ombudsman Service involving BNPL companies rose by 36% to 220 last year.
Though the ombudsman does not currently have power to intervene in these disputes, it’s uncertain whether new legislative powers will lead to a massive increase in complaints registered. Insiders have pointed out that the large fees involved in such cases may be incentive for BNPL firms to simply give disgruntled customers the relatively small sums involved before they come under investigation.
Why are you making commenting on The Herald only available to subscribers?
It should have been a safe space for informed debate, somewhere for readers to discuss issues around the biggest stories of the day, but all too often the below the line comments on most websites have become bogged down by off-topic discussions and abuse.
heraldscotland.com is tackling this problem by allowing only subscribers to comment.
We are doing this to improve the experience for our loyal readers and we believe it will reduce the ability of trolls and troublemakers, who occasionally find their way onto our site, to abuse our journalists and readers. We also hope it will help the comments section fulfil its promise as a part of Scotland's conversation with itself.
We are lucky at The Herald. We are read by an informed, educated readership who can add their knowledge and insights to our stories.
That is invaluable.
We are making the subscriber-only change to support our valued readers, who tell us they don't want the site cluttered up with irrelevant comments, untruths and abuse.
In the past, the journalist’s job was to collect and distribute information to the audience. Technology means that readers can shape a discussion. We look forward to hearing from you on heraldscotland.com
Comments & Moderation
Readers’ comments: You are personally liable for the content of any comments you upload to this website, so please act responsibly. We do not pre-moderate or monitor readers’ comments appearing on our websites, but we do post-moderate in response to complaints we receive or otherwise when a potential problem comes to our attention. You can make a complaint by using the ‘report this post’ link . We may then apply our discretion under the user terms to amend or delete comments.
Post moderation is undertaken full-time 9am-6pm on weekdays, and on a part-time basis outwith those hours.
Read the rules hereLast Updated:
Report this comment Cancel