LittleLaw Looks At… Buy Now, Pay Later: A piece of the consumer debt puzzle

May 9, 2022

8 min read

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What’s going on here?

The rapid growth of the Buy Now, Pay Later (BNPL) sector is raising serious consumer protection concerns as the cost-of-living skyrockets.

What are Buy Now, Pay Later products?

BNPL products are seen as an attractive alternative to credit cards as they enable consumers to delay or split the cost of purchases without paying interest unless they miss scheduled payments.

BNPL is revolutionising the face of consumer finance. At first glance, the benefits of BNPL products seem obvious. The ability to pay a set amount of interest-free instalments rather than an unaffordable one-time payment. Generally, if you are faced with the choice of paying a cost now and paying an identical cost later, later is better. However, as prices continue to increase in all aspects of daily life, there is the risk that consumers may fall into debt traps.

The popularity of BNPL services has soared in the past couple of years, as the market quadrupled in 2020 and doubled in 2021 to $5.7bn.¹ Whilst confidence in the market dips, at the same time, consumer demand for BNPL services is increasing. More people need or are willing to use these services yet more people are unable to make repayments.

The following are just a few of the many companies offering these services across a broad range of consumer products:


Klarna is one of the most well-known providers of this service alongside Clearpay and Laybuy. This BNPL company is partnered with sizeable retailers including Nike, ASOS, JD Sports, H&M, Ray-Ban, and many others. The Swedish start-up has enjoyed meteoric growth and a massive valuation of $46bn.

Klarna has been at the centre of this controversial market. In February, Klarna along with four other BNPL firms changed their terms and conditions following intervention from the Financial Conduct Authority (FCA). The FCA alleged that these BNPL providers had “potentially unfair and unclear” terms and conditions.2 In the same month, Klarna launched a reward programme.3 Critics of the programme claimed it will encourage overspending as customers will be increasingly focused on rewards and not affordability of repayments. 


Zilch has grown at an impressive rate, becoming the fastest European company to become a unicorn with a $2bn valuation. A unicorn company is a privately held startup company valued at over $1 billion, with the term ‘unicorn’ being used to represent the statistical rarity of such successful business ventures. Virtual Zilch ‘cards’ are now accepted at thousands of retailers across the UK, including supermarkets. Zilch is a great example of the BNPL market moving into supermarkets and household basics.

Zilch’s marketing has received criticism that the product could lead to debt cycles. A blog on Zilch’s website featured ’11 must-have shop now pay later’ buys from Sainsbury’s. The blog has previously included ‘treat yourself’ items such as discounted pizzas and cake.4 It has pushed somewhat enticing taglines like ‘At Zilch, you can have your cake and eat it too… That’s why we offer you shop now, pay later, not just at Sainsbury’s, allowing you to push the boundaries of your everyday existence, and get even closer to living your best life’.

Whilst these may sound great, critics claim that this type of marketing preys on people’s fears of missing out.5 This encourages people to indulge in non-essentials as living costs soar. Consumer campaign group Resolver was particularly critical of the virtual Zilch card saying “on the face of it, Zilch is making it easier to spend – and by doing it on a card it’s even harder for people to know what their debts are, how much they are spending and what the ultimate price will be”.


Bumper is a BNPL provider that offers interest-free payments for financing and managing car repairs. Primarily backed by Autotec and Jaguar Land Rover, 60% of the franchised UK automotive car dealer market uses its platform.6 Such demand for this product has led the company to seek expansion into every major European market by the end of 2022.

As the average repair bill is roughly £600, this does look to be a really useful service. Bumper earns a commission of the sales it makes and it helps to increase conversion rates for dealerships because it reduces the upfront payment from consumers. BNPL used in this context does seem to be an area where this can be particularly useful for customers.

Fly Now Pay Later

At the beginning of this year, a start-up allowing travellers to pay for trips in instalments brought the total investments from three funding rounds to $150m to help global expansion.7 Customers can use the lender to pay for a trip in 12 monthly instalments using its travel partners or app. Jasper Dykes, the founder and chief executive, said that interest rates on these instalments range from 0% to 40%. Over 250 companies are currently using Fly Now Pay Later, with partnerships including Malaysia Airlines and Universal Air Travel Plan.

Similar to Bumper, given the cost of many holidays, this has the potential to be an extremely useful platform.


Natwest will be the first UK high street bank to join the controversial market this summer, announcing that it was determined to make BNPL better and safer.8 Whilst Natwest isn’t the first UK bank to launch a BNPL product (Monzo joined the market in September 2021), it is the biggest UK household name to start offering this payment method and it has a significant customer base to market it to. Natwest has been keen to emphasise its attitude to providing customers with protection as expected from a fully regulated bank. 

The examples used above hopefully demonstrate some of the pros and cons of the BNPL concept.  Being able to split hefty payments into monthly instalments is great, but it seems with smaller goods and household basics it may be difficult for consumers to resist temptation or even fully understand how much accumulative debt they are taking on.

How are these companies making money with zero interest credit rates?

BNPL companies make money from the retailer rather than the customer. Providers take a cut from anything they help the retailer sell. Their pitch to entice retailers is that consumers spend significantly more when using this service, making it worth the discount.

Buy Now, Default Later

As highlighted above, this sector has extended to almost every aspect of daily life. Easy access to such services has given rise to particular concern for young and vulnerable customers. As this unregulated payment sector does not require hard credit checks, this group of customers may be particularly vulnerable to spending more than they can afford. The Centre for Financial Capability found in a study that nearly a quarter of UK adults who had used BNPL services had defaulted on a payment, rising to 35% for people between 18 and 34.9 Negatively affecting your credit rating for several years after defaulting on a £5 pizza is certainly not a good deal. BNPL services can refer missed payments to credit agencies. So, if a consumer is late for a payment or misses it altogether, their credit score can be affected. Also, if payments are missed altogether and continue to be missed, some companies may pass unpaid debts on to a debt collection agency, which damages their credit rating.

Another concern is consumer perception of the service itself. Many users simply do not realise they are taking on debt (to see our article on this, click here). In 2020, the UK’s Advertising Standards Authority banned several of Klarna’s advertisements that “irresponsibly encouraged the use of credit to improve people’s mood”, and introduced guidelines requiring all providers to make clear that BNPL is a type of debt.10 These guidelines seem to have had little effect. Research from Mintel demonstrates that despite clarity surrounding the debt obligations of BNPL, a lack of understanding about the service continues to exist.11 In particular,  the lack of financial literacy and experience among younger age groups continues to make them particularly susceptible to inadvertently getting into financial difficulty.

As household incomes continue to be squeezed by record inflation rates, the likelihood of consumers defaulting is only going to increase. Consumer borrowing seems to be rapidly increasing as UK consumers borrowed a net £1.5bn through credit cards in February.12  This is a particularly worrying figure when compared to the average borrowing of £400m in the previous six months. Stepchange, a debt charity, reported an increase in the amount of people looking for advice and revealed that a common reason for debt in February was the cost of living pressure.13 Pressure on consumers to maintain their lifestyles is increasing and this may lead to a new debt crisis.

LittleLaw's verdict: Regulation cannot come soon enough

This market is putting a considerable amount of people at risk of debt. The FCA has to ensure that these providers conduct proper affordability checks before granting any finance and ensuring that consumers are treated fairly if struggling to meet repayments. If used correctly, this business model has the potential to improve the lives of consumers.

Ultimately, the FCA needs to be swift when regulating this sector. It certainly has the potential to bring a wealth of benefits to consumers, but in the absence of full affordability assessment checks on customers it poses a significant risk. The BNPL world needs to change to see more protection for customers. Users can accumulate debt across multiple lenders without these checks, only exacerbating their financial situation. Regulation is far away but perhaps BNPL providers themselves can act ahead of the incoming regulations. This may enable the market to sustain itself during the cost of living crisis and build a reputation for prioritising responsible lending.

Whilst people try to maintain their lifestyles as the cost of living continues to squeeze, what will happen to the motto – ‘don’t spend what I can’t afford’?  One can only hope we will avoid the looming credit crisis before it is too late.

Report written by William Sutcliffe

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