Klarna and its pals have taken over the British High Street, with buy now pay later (BNPL) loans exploding in popularity. The market ballooned from £60m in 2017 to more than £13bn last year. One in five Britons used it to borrow money over the 12 months to May 2024.
Regulatory oversight is long overdue and with legislation finally on the books, the Financial Conduct Authority has delivered its proposals.
They are really quite mild. It is worth remembering that the government decided not to fully apply the Consumer Credit Act to these products even though, I repeat, they are loans. This has tied its hands to some extent.
Under the plans, BNPL lenders will have to secure authorisation, check that people can afford to repay their loans, spell out the risks and charges for late payment, and offer more support to those who get into trouble. That could include forbearance (the sector will just love that one). Consumers will also be able to approach the Financial Ombudsman in the event of disputes.
These loans are disproportionately popular among younger people (30 per cent of adults aged 25-34 used them at least once in the year to May ’24), poorer people (nearly one in three adults with ‘low resilience’ took them out) and those living in the most deprived parts of Britain (29 per cent).
I’m not about to deny that they can prove useful. Deferring the cost of purchasing a new school uniform for the kids for 30 days, or paying in three monthly installments, could be helpful to a low-income parent.
But that’s not how these things are typically used, and they are so easy to access it is very easy to get into trouble with them if they aren’t used carefully.
In my view, this is the crack cocaine of lending. The business model speaks to that. BNPL firms receive a commission on each transaction from the retailers they work with. Why are the latter willing to pony up? Because BNPL loans encourage consumers to spend more.
Commissions aren’t the only revenue stream available to firms in the sector, however. They also typically charge late fees and the FCA found what it called “high arrears levels” in the sector with some firms generating “significant revenue” from these charges. It further found that consumers weren’t always aware that they could get hit for failing to pay on time.
Critics of regulation argue that people shouldn’t need handholding or nannying.
The watchdog found that the most common use of BNPL in the 12 months to May 2024 was for lifestyle and beauty purchases (41 per cent), followed by ‘treating myself or other people’ (37% per cent). Surely it would be churlish to deny people the chance of a good time?
I get the point. I do. But consumers should know what they’re getting into and the sector hasn’t always been good at explaining the risks. Indeed, the regulator criticised what it termed “benefit framing” where firms emphasise the good bits and downplay the dangers.
For the record, Klarna described the proposals as “a win for the consumer” while rival Clearpay said it would “support the FCA as it consults on and finalises its specific rules for the sector”.
Make of that what you will. I still fear that BNPL’s explosive growth, and some of the practices found by the regulator, means the potential is there for a serious scandal. Meanwhile we’re likely to see snowballing numbers of cautionary tales, in which people find themselves plunging into financial hell.
That being the case, it is regrettable that the wheels of regulation are still moving at the speed of a sloth with a stitch: After five years of consultation with the Treasury, oversight of the sector still won’t finally come in until next July.
