The biggest trend to hit the online retail sector is buy-now-pay-later services. Since the start of the pandemic, five million people in the UK have used these schemes to spread out the cost of purchases online. As tempting as they sound, are they luring thousands into a debt trap?
Last month we discussed the government’s new scheme (Breathing Space) to help people in debt. Since the start of the pandemic the number of people in problem debt has risen from 1.7 million to 2.4 million (*StepChange). This figure is likely to increase when furlough ends in September, and the ramifications of the past year (and more) are truly felt.
Unemployment and drops in income are the main drivers of the debt crisis, but the coping strategies that people have turned to are making things worse. Take the rise in popularity of buy-now-pay-later (BNPL) services.
Since the UK went into lockdown, the increasing number of online retailers offering BNPL has meant more people than ever are buying on credit. According to the FCA, five million people in the UK have bought BNPL products since the beginning of the pandemic. What many people don’t realise when they use a company like Klarna, Clearpay or PayPal, is that they are entering into credit agreements that could result in late payment fees. The main concern around BNPL services is that they could encourage people to spend more than they can afford, building up unmanageable debts.
Quids in! has witnessed this first hand at its support centres. The magazine has also had reader’s write in detailing their distress at mounting debt arising from such schemes.
Who Is Most At Risk
BNPL providers carry out very light credit checks and don’t report how much you have already borrowed to credit rating agencies. Research* shows that women are more likely to use BNPL schemes than men. Because BNPL has no positive impact on credit scores, it is one of the reasons why women have lower credit ratings and are seen by borrowers as higher risk. Therefore they are less likely to have a mortgage, credit card or personal loan, compared to men (*Credit Karma).
BNPL schemes usually allow you to delay paying for items for 30 days to six weeks. This means it’s possible to rack up bills as high as £2,000. Some schemes will wait for you to make a payment, but others take them automatically from your account.
In a recent analysis, debt charity StepChange found that of its clients with BNPL debt, two-thirds are women, typically aged around 30 (36 per cent of clients with BNPL debt are under 25), and are single. To add, those with BNPL debt have around eight or nine other types of debt – only one per cent of clients with BNPL debt have no other debts or arrears. The typical amount of outstanding debt (not just BNPL) owed by a client with BNPL debt is around £13,500.
A spokesperson from the charity said: “Among StepChange clients, those who have BNPL debts are typically young, which is particularly concerning alongside the disproportionately high number of young people StepChange has been seeing in recent years.”
These findings are supported by recent data that shows people are taking out credit cards to pay off their BNPL debts. Digital bank Zopa, says the number of transactions on its credit cards (which charge between 9.9 per cent and 34.9 per cent APR) to BNPL firms has increased by 30 per cent between September 2020 and February 2021.
Case study
Karen* came to us with debts of over £3,000 that had built up during lockdown. A single mum with two children, Karen had started ordering toys and clothes from online shopping catalogues including Littlewoods, Very, Studio, and Simply Be. Using BNPL, the payments were spread out over three months. When Karen started to miss multiple payments, interest was added on top of the charges.
She then took out a credit card with 118 118 to pay off some of the catalogue debts along with a couple of household bills. This made matters worse. “Nobody told me about the interest-free period that came with the card – it was really misleading,” she said. When Karen tried to close the account she was charged a bill for over £1,000.
Unfortunately, Karen’s story is not unusual. Whether it’s a lack of clear information or support for vulnerable customers, people are getting further into debt and the lack of regulation in the market isn’t helping.
*Name has been changed
Moving Forward
Fortunately things are looking brighter. Earlier this year the FCA published a report – the Woolard Review – calling for BNPL products to be brought under its regulation. The government has given the Review the green light, meaning BNPL firms will now be required to make proper affordability checks and treat customers in vulnerable circumstances fairly. It will also mean consumers have access to the Financial Ombudsman Service when things go wrong.
The FCA has said there needs to be more funding of free debt advice and alternatives to high-cost credit. In its recommendations it says that credit unions should be reformed and mainstream lenders encouraged to do more to protect vulnerable consumers. The FCA has appealed to the Government and the Bank of England to work together to introduce these policies.
In response to the news, a StepChange spokesperson said: “Buy now pay later services are often marketed as a source of convenience but the financial commitment should not be underestimated – the main benefit to retailers offering these services is to sell more goods. It’s essential that these services and retailers give clear, plain English information for customers, and regulators need to continue to keep a close eye on how well consumers understand the types of services they’re being offered at the online checkout – especially those that could have the potential to see them build up debt.”
