Buy now, pay later schemes need urgent regulation to protect shoppers

Consumers are able to run up thousands of pounds of debt with more than one provider, with no proper checks on whether they have the means to repay the money

The ability to ‘buy now, pay later’ has become increasingly available to consumers (Getty Images/iStockphoto)

Spending more time at home during the past 15 months has, for many, also meant spending more time online. Without the ability to browse in store, to shop has been to scroll – and all from the comfort of your own sofa.

As if to provide further encouragement, the experience is made even easier by the option of spreading the cost of items over interest-free monthly repayments, with no ongoing obligation. This payment method, known as buy now, pay later (BNPL), has become widespread, with usage rising rapidly in the past year.

Widespread, too, is the perception of typical BNPL users. To many, they are young, single, fashion conscious and often female. However, new research from Which? tells a different story and uncovers a patchwork of people using BNPL services to cater to different needs.

The consumer champion surveyed over 15,000 people and, having allowed for their demographics, found that users of BNPL are likely to have: children; a higher income; experienced a major life event such as the loss of a family member or a job in the last year; or recently missed at least once on a household bill or credit payment.

BNPL products can be an important alternative to other, more costly types of credit. Spreading the cost interest-free over manageable monthly repayments works well for many users. However, they come with their own risks – not least because there is a serious lack of consistent information to enable consumers to make informed decisions on which payment method is right for them.

Worryingly, it is perhaps that appetite for risk that draws some users to BNPL services. Survey respondents that had used BNPL were more likely to tell us that they preferred to “think about today rather than the future”. Yet just over a tenth of them had low confidence in their own understanding of financial services. Compared to the rest of the general population, BNPL users were more likely to downplay their ability to cover an unexpected expense of around £500 using credit.

Clearly, consumers that browse for items should always check whether they can afford them before they purchase. However, such discrepancies raise serious concerns about the quality and rigour of credit checks made by firms that offer BNPL – and could also leave some consumers with a false sense of financial security should things go wrong.

To better protect consumers, two things should happen. First, credit checks should be mandatory before a user is approved. At present, consumers are able to run up hundreds or even thousands of pounds of debts with more than one provider, with no oversight over whether they have the means to repay the money. Providers should communicate with each other to ensure an individual is not able to miss repayments with one firm and spend with another.

Second, firms should be more transparent about the risks of using this payment method. The allure of BNPL is not just in its convenience, but in its apparent affordability. Consumers tend to spend more at the checkout when offered credit because they believe that the idea of spreading repayments over a longer period works better financially, especially if items are interest free.

In some cases, BNPL is the default payment option, meaning buyers do not and cannot fully consider the implications. Information should therefore be presented clearly and upfront outlining what happens in the event of late or missed payments.

Encouragingly, both the government and the Financial Conduct Authority agree that the market needs regulating. That we are even able to talk about reform is testament to the strength of feeling from a loose group of campaigners – from Alice Tapper of Go Fund Yourself, to interested MPs like Stella Creasy and consumer groups like Which? – that spotted the potential harm. But with the pool of people at risk far deeper than many believed, legislation must come into force quickly.

Until then, big and well-known BNPL providers will continue to advertise the ease and simplicity of their services, catering for those on a spectrum ranging from time-poor parents to people in vulnerable circumstances experiencing stressful life events. Their opaqueness about the inherent dangers is cause to worry now rather than later.

Rocio Concha is Director of Policy and Advocacy at Which?