For better or worse, buy-now-pay-later has taken the online retailing world by storm. From its fintech infancy circa 2012, BNPL exploded during Covid with global usage of these not-quite-credit services surging by almost 400% between 2019 and 2021 as lockdowns fuelled online shopping sprees while folks were stuck at home.

The inflation crisis that ensued thereafter as the world economy resumed business created an ideal second stage of attack for BNPL that is showing no signs of abating.

According to research from UK credit broker Finder, half of UK adults had as of the beginning of this year used BNPL at some point in their lives. That was up from 36% at the start of 2023. More than a third – 38% – had used it in the year to January 2024, and during that period 14% used it for the first time.

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This has prompted concerns that many – particularly younger and vulnerable consumers – are unwittingly falling into unsustainable debt as they scramble to maintain their lifestyle or simply pay for necessary goods now beyond financial reach. The Labour government has confirmed its commitment to greater regulation of this largely ungoverned sector, but the details and timing are as yet unknown.

With the option of spreading the cost of purchases into smaller repayments across a number of weeks or months built into the online shopping process, BNPL from providers such as Klarna or Zilch is about as frictionless as it gets when it comes to borrowing money. Who wouldn’t opt for the interest-free alternative with soft credit checks minus the hassle of a lengthy application form?

But as insolvency practitioner Paul McDougall of Scottish accountancy firm Wbg warned yesterday, these seemingly attractive flexible payment options are sucking some into a cycle of debt.

“With easy access to credit, consumers are increasingly financing purchases of non-essential, low-cost items such as T-shirts, shoes, and gadgets, underestimating the long-term financial burden,” he said. “As debt accumulates and interest charges start to apply, consumers may find themselves struggling to manage their finances, falling into a pattern of missed payments and additional charges.”

BNPL models have been branded a “lifeline” for e-commerce merchants who consistently report higher cart conversion rates and increased order values when split payment options are available. From the consumers’ perspective, these arrangements can be particularly helpful when financing unexpected expenses or higher-value purchases.

But BNPL also persuades otherwise hesitant buyers to complete purchases of unnecessary goods, as Mr McDougall points out. And this, of course, is not inherently positive.

On the flip side, research carried out last year by the Money & Pensions Service found that one out of five BNPL customers in the UK – almost two million people – have used it for essentials including groceries, toiletries, household bills and fuel. BNPL’s value may seem more obvious for these sorts of purchases, but splitting the cost of loo roll into four easy instalments indicates a level of desperation that is not adequately addressed by BNPL models.

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There has been a sharp increase in the number of people using BNPL in this way, according to debt assistance provider Money Wellness. It also notes that on average BNPL only makes up about 5% of a person’s total debt, meaning they’re also usually behind on other repayments such as credit cards, personal loans, utility bills, and rent or mortgage payments.

Nearly a third of those surveyed by the Money & Pensions Service further reported issues with managing their BNPL spending, with 14% missing a payment and the same again saying they had been charged a late fee.

Asked what had caused this, 34% reported “prioritising other borrowing repayments” and 32% said they didn’t know a payment was due. One of the biggest stumbling blocks came with what is known as “loan stacking”, where an individual has multiple loans running in tandem.  More than one out of five said they didn’t know they would be charged a late fee, or that they had borrowed “too much”.

Against this backdrop there is concern in particular for those deemed “vulnerable”, with the report revealing that people from this group are twice as likely to use BNPL.

More than half of those with a mental health condition (55%) and those with a cognitive disability (52%) had used BNPL compared to roughly just a third of people who do not. Previous research suggests the uptake of BNPL among these groups is linked in part to impulsive tendencies associated with their conditions.

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Furthermore, the Money & Pensions Service noted that people with certain cognitive disabilities may also struggle with accessing and understanding complex documents usually associated with financial applications. This is one of the main reasons why those with disabilities, metal health problems or longstanding health conditions are significantly less likely than others to have a credit card and therefore more prone to turn to alternative payment methods.

BNPL is also more prominent among ethnic minorities, with 60% of those from this group having used it to borrow money compared to just 35% of white people. Research suggested that BNPL allows ethnic minorities to bypass systems and processes that have historically been exclusionary.

The jury is still out on BNPL’s merits, but without clear guidelines and regulations it could easily become a predatory practice among the sector’s sharper operators.

Labour has missed its own deadline for introducing legislation within its first 100 days in office, which would have been by the end of September, and with Christmas fast approaching many will again this year turn to BNPL to help finance their holiday spending. An early festive forecast from ACI Worldwide predicts that purchases made through BNPL and digital wallets will more than triple this year.

Regulation will provide greater protection for consumers but once in place industry experts are also predicting that BNPL providers will become more forceful with their debt collecting. Caveat emptor.