Buy Now, Worry Later: Buy Now Pay Later users are unaware of credit risks

January 15, 2022

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3 min read

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What's going on here?

A research study conducted by Which? warns that many ‘Buy Now, Pay Later’ (BNPL) users do not understand the debt risks that come with the payment scheme.

What does this mean?

BNPL schemes are payment methods offered on many online shopping websites that allow customers to schedule payment installments or pay at a later date. Offered by services such as Klarna and Clearpay, BNPL is effectively a form of credit, however recent studies show that many of its users see it as a budgeting or money management tool with no credit checks and a simple sign-up system, highlighting one issue with the scheme. This opens up credit risks for consumers such as late fees, a hit to their credit scores, or referrals to debt collectors. In addition, researchers found low engagement with the terms and conditions when agreeing to BNPL, assuming that others had put in the means to ensure a safe and risk-free experience for them. Finally, the research found that heavily advertised BNPL schemes pushed customers to use the service even when they had no intentions to initially. An interviewee of the Which? study remarked, ‘‘You put things in your basket and it says payment method and it says pay with Clearpay and you just think, ‘why not?'”.

What's the big picture effect?

The concern over consumer awareness of the implications of BNPL schemes are important especially in the context of the COVID-19 pandemic. Many people’s personal finances have been hit by the recession, unemployment, and furlough as the world shut down in 2020 and the constant waves of variants continue to cause instability. Shoppers are more likely to utilise payment schemes like this during more difficult times, causing credit and financial risks to increase. In fact, an additional study by emerchantpay found that in 2021, the mere option of BNPL increased the possibility of making a purchase by 38%. Constant lockdowns and restrictions have caused the growth of e-commerce and retailers to adopt these payment schemes in order to adapt to consumer trends. Predictions report that 27% of those aged 40-50 and even those aged 55-70, which make up the majority of high-street consumers, are expected to shop less in person. It may be safe to say that, with the fall of high street shopping and the rise of online retailers, the flexibility and accessibility of the payment schemes and the instability of COVID regulations will make BNPL schemes consistently popular. This becomes all the more reason for further research and implementation of responsible regulations on what the schemes can and cannot provide for its users.

The Which? study calls for stronger regulation on Buy Now, Pay Later schemes and further awareness of credit implications. Currently, BNPL schemes aren’t regulated by the Financial Conduct Authority. This means that services either don’t run credit checks at all or only run “soft” checks (such as name and address) before signing consumers onto the agreement. Online retailers and BNPL schemes both should ensure that consumers are fully aware of how the scheme works, understand that they are borrowing money, and the risks of late or failed payments before being able to use the services. In addition, the study calls for providers to increase interaction with their terms and conditions and make them readily available even before regulations eventually kick in.

Overall, the rising popularity of Buy Now Pay Later schemes point to the necessity of strong regulation and policy enforcement. Customers often view the payment scheme as a budgeting tool rather than a form of debt and various risks exposed to its users, such as impact to credit scores and late fee payments, call for BNPL providers and online retailers alike to take responsibility. With the financial instability and cycle of COVID regulations, e-commerce is becoming more and more popular. Terms and conditions should be made clear at the time of purchase, stronger credit checks should be enforced, and certain policies could be implemented to minimise the risks for consumers.

Report written by Woojin Jina Nam

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