Government must act on buy now, pay later. It’s a potential problem that needs nipping in the bud

Britain’s financial watchdogs don’t generally get much in the way of sympathy but when it comes to money lending you have to feel for them.

It seems that as soon as they bring one form of problematic lending to heel another emerges. It’s what the Financial Conduct Authority (FCA) snappily refers to as “innovation in the unsecured credit market”.  

But is the latest of these innovations, the booming buy-now-pay-later (BNPL) industry, really a problem given it doesn’t actually charge consumers any interest?

This is a business that exploded in 2020, during which time the size of the market more than trebled.

Its leading lights each offer slightly different products, with different terms and conditions, sometimes depending on the retailer consumers use them with.  They’ve hooked some big ones. JD Sports, Asos, H&M, L’Occitane, Lush and many more are all listed by Klarna, one of the sector’s leading  lights.

Sometimes their customers get 30 days to pay. Sometimes they offer two or three instalments. The credit checks, where they’re carried out, are described by the FCA as “soft” because the industry wants to make everything as easy as possible because it wants people making as many purchases as possible. 

Operators make money through charging transaction fees to retailers. Process enough of those and you’ll do very well. Just ask Visa or ApplePay.

Retailers are more than happy to play ball because this form of payment boosts sales. Indeed, one BNPL firm boasted to a potential business partner of up to 30 per cent higher “conversion rates” when their product was used.

The advantage to the shopper is that they get their party gear, or their gifts, or just their retail therapy up front and can pay for it down line when their wages roll in without incurring the sort of usurious interest rates payday lenders charge.

So everyone’s a winner. Why, then, does Christopher Woolard talk about an “urgent need to regulate all buy now pay later (BNPL) products” in a report on unsecured lending compiled for the FCA?

Why does he go on to say that “while the emergence of unregulated BNPL products has provided a meaningful alternative to payday loans and other forms of credit, BNPL also represents a significant potential consumer harm”.

Simple. BNPL is too easy. It’s fine if consumers manage it, and can afford to pay when the bills come inn. But they can’t always do that. 

Here’s what I think is the killer paragraph in Woolard’s review:

“The review was told by a major UK bank that of 677,000 of their personal current account (PCA) customers who made a payment to two of the large BNPL providers in November 2020, 10 per cent had exceeded their overdraft allowance in the same month.”

Promoted by glossy ads - some of which have been banned - and social media ‘influencers’ selling aspiration, it’s all too easy to see how BNPL can suck consumers into spending far more than they can really afford.

Debt is debt and cheap debt to cover consumer goods can often lead to much more expensive, interest bearing debt to cover the cost. Overdrafts are one example of that. Credit cards are another. You want a third? Ding, ding, ding: payday loans to finance what people owe BNPL firms and to kick the due date further down the line. The ease with which people of limited means can find themselves in a world of pain is obvious (and frightening).

The review’s timing is particularly apposite given the economic backdrop, which is set to remain grim for some time. Government support has shielded the working population from the worst consequences of the economic shock delivered by the pandemic. But the Job Retention Scheme covers only 80 per cent of people’s wages. Related schemes for freelancers contain holes. Some forms of gig economy work have dried up. Unemployment is rising.

People under financial strain often resort to credit.  We’ve seen it happen before. But troublingly, the interviews Woolard and his team conducted found that while most consumers saw BNPL as a financial service, they didn’t see it as credit. Which it is.

They also thought it was regulated. It is not.

So, yes, his call for oversight of the sector is well made and very timely. The government should heed it and facilitate regulation before things get messy. There are quite enough problems festering in Britain without adding this one to the list.