Feature: Hurt now, help later
Jamie Veitch, Head of Communications at Responsible Finance, examines how the Buy Now Pay Later system exposes customers to risks, as small debts snowball into huge amounts.
It looks great on the surface. Spread a purchase into smaller payments using a ‘Buy Now Pay Later’ service without paying any interest. A handy way to balance the cost of a discretionary, one-off buy over several weeks, fortnights or months. An almost essential option for a retailer to offer, like taking payment by debit and credit cards – ‘everyone else accepts this so we’d better.’
And we’ve embraced Buy Now Pay Later, inviting it into our lives with an insatiable appetite. Consumers’ use of BNPL has rocketed; it has spread so far beyond fashion and accessories (where it took off) that it’s hard to find an online retailer which doesn’t allow payment through it.
Buy Now Pay Later providers have a great sell to retailers. They take on credit or fraud risks and talk of big rises in ‘conversions’ (turning website browsers into shoppers) and massive jumps (30% or even 55%) in the average value per order for retailers who use them. As the British Independent Retailers Association tells it: ‘Customers are more likely to complete a purchase and spend more if they feel that it is affordable.’
Sounds good for businesses, and we keep saying how we want them to thrive. So what’s the problem? If you have a certain amount of money for discretionary spending each month, and want to buy something which costs more, BNPL lets you spread that cost and pay no interest. Aren’t you the winner here?
Not if you didn’t realise you were signing up to a credit agreement with (in some cases) rapidly escalating penalties for making any payments late. Not if your misunderstanding of what you’ve signed up to destroys your credit rating, your health or both. And not if you’re squeezed to the pips by the cost of living crisis, and you turn to BNPL for essentials (some BNPL providers have moved into groceries and energy bills), deferring a problem today to a bigger one in a month or two with no chance of making the repayments for the credit you’ve been granted.
Then there are people with multiple BNPL agreements, a tottering tower of commitments with scant foundations since – astonishingly – many BNPL providers have made little effort to check whether people they were granting credit to could actually afford the repayments. The FCA described BNPL providers’ approach as ‘a very basic credit assessment, usually through a combination of soft credit searches and previous repayment history. This often focuses on credit risk, rather than affordability.’
Ok, but we’re all adults and if we enter into an agreement we should intend to abide by its terms, surely? If we don’t, we face the music. Why all the hand-wringing about something consumers love to use? Are providers forcing us to use BNPL at gunpoint?
No. But we’ve long known of the damage BNPL can cause. Two years ago hundreds of people told journalist and campaigner Alice Tapper how easy BNPL made it to overspend, get into problem debt and destroy their financial, physical and mental health with. Tapper was clear: there’s a place for BNPL and it can even be a boon for savvy consumers, but she was damning about a lack of transparency and misleading promotion. The heartrending stories she collected showed the lack of regulation came at a cost, especially for young and vulnerable consumers, and Tapper campaigned for action to protect them through appropriate regulation.
Next, the FCA’s Woolard review called for ‘urgent amendments to legislation’ so BNPL is better regulated, describing multiple potential harms to consumers. That was February 2021. Government then announced its intention to regulate, and Treasury ran a consultation from October to December of the same year. Finally, in June 2022, the Government announced BNPL will be regulated. But there’s no chance of the secondary legislation needed being enacted until autumn 2023 at the earliest.
Tick, tock. 2023 isn’t soon enough. What happens until then? StepChange Debt Charity recently published more evidence that BNPL products are being widely used by people experiencing financial difficulty. And community lenders, little known but high-impact organisations which exist to give more and better choices to people excluded from mainstream credit (and not to pay profits to shareholders), have seen a jump in the number of financially vulnerable people with multiple BNPL loans.
I spoke with one, a Glasgow care worker whose name I’ve changed at her request to Julie. She told me Buy Now Pay Later looked like a no-brainer: ‘Kids grow fast. Splitting a payment into three chunks made sense so I could spread the cost of some new school uniform.’ But by the time she’d paid off the £45, another unexpected bill had arrived, this time for a school trip. That one went into Buy Now Pay Later too, and it was the start of a spiral which left Julie with £400 of Buy Now Pay Later debt and £325 in charges on top.
‘They just kept increasing the amount they let me put on Buy Now Pay Later,’ said Julie. ‘It seemed like a good way of spreading the costs out. My gas and electric had shot up too so I started paying for the meter on it. But with the kids’ uniform, the gas and some groceries all the £5 or £10 a week payments soon added up to a huge amount – £50 or £60 a week. I missed one, small payment for £5 and they added a £6 fee on top, that meant I missed another repayment, and soon they’d hit me with fees which were nearly as much as what I had paid for.’
Julie approached Scotcash, a community lender in Scotland and Responsible Finance member. Its Affordable Credit Advisor Gillian Coats says Buy Now Pay Later has become widely used with at least 50% of the people she advises uses it. And she feels it’s insidious, dangerous, and pushing people into much worse financial positions than they were without it. ‘At first people think it’s a convenient rolling facility, and the sad thing is more and more people are using it for daily priorities like groceries and things their kids need, but quickly their balance and credit limit increases and becomes unaffordable. Often they’ll manage their first two or three payments then things get really out of hand. Although lots of people on low incomes are really well prepared, many don’t know what they’re getting into, and Buy Now Pay Later providers are encouraging them to put more and more things onto it without bothering to check whether they can afford the repayments.’
That’s exactly what happened to Julie, a single parent in rented accommodation with a household income of around £16,000 per year from part time work and Universal Credit. ‘My bills have already gone through the roof this year,’ she said. ‘When I needed to pay for school uniforms and then a trip and it seemed like the safest way to do it. But I can’t believe how easy it was for it to build up, and when I missed a couple of payments they added these enormous fees.’ Ultimately Scotcash was able to help Julie: ‘We looked at her income and outgoings and were able to make a small, short term loan she could afford to repay, to pay off her Buy Now Pay Later providers and tide her over,’ said Gillian. ‘But it’s horrifying to see that while things like bank fees are capped, the charges Buy Now Pay Later providers make when people are just a day late aren’t and they soon escalate. They’ve been doing no affordability checks and just don’t seem to care about whether or not people are vulnerable.’
Scotcash isn’t the only community lender hearing stories like Julie’s first hand. James Wilkinson of Fair for You Community Interest Company told me: ‘The number of Buy Now Pay Later transactions we’re seeing among applicants has nearly doubled since October, when the Universal Credit uplift was removed. From my perspective, regulation can’t come soon enough – vulnerable people are being lured by BNPL firms who increasingly seem to want to provide credit for pretty much anything. Our profile of applicants typically already have significant debts from high-cost predatory lenders that they are trying to manage, and it is completely irresponsible for BNPL firms to add to those debts without proper affordability checks.’
Other lenders talked of ‘an explosion’ in applicants with stacked-up BNPL loans, credit which seems to make many people’s lives worse. StepChange Debt Charity found people with two BNPL loans to be twice as likely as all adults to say they are finding it difficult to keep up with their household bills and credit repayments.
As the cost of living crisis bites further, financial exclusion grows. And while credit is not the solution to skyrocketing bills, or wages or benefits that can’t meet people’s day-to-day living expenses, it is a fact of life. People use credit in emergencies, like when a fridge needs replacing, a boiler breaks down or there’s a big expense to meet.
Between 11 and 20 million people are now excluded from mainstream financial services. If they need to use credit, they deserve better options than exploitative, harmful and even illegal ones (data shows loan sharks are feasting). And while it might look attractive on the surface to borrow through BNPL at no interest, it’s an under-regulated sector with a trail of destruction.
This isn’t a call to ban BNPL or remove choice from consumers and businesses. But I couldn’t sell you a pint of ale without a license; can’t operate a care home or run a school without being inspected; wouldn’t be allowed to sell you a used car unless it was roadworthy with an MOT; and certainly can’t set myself up as an accountant, IP lawyer or doctor unless I’m qualified and appropriately, proportionately regulated.
So why is Government going to wait for over another year while some bad actors within an under-regulated sector take whatever they can from stretched consumers? BNPL is clearly a credit product, so police it under existing rules at least until we refresh our legislation. Otherwise there’ll be carnage by the time we get round to acting.
Photos by Towfiqu barbhuiya