In tough economic times, paying for goods in several installments instead of paying for the full cost upfront has never been more attractive to consumers.
It comes as no surprise then that in the United Kingdom, the use of buy now, pay later (BNPL) nearly quadrupled in 2020 to 2.7 billion pounds (about $3.6 billion) of transactions, according to official data from the Financial Conduct Authority (FCA).
“My concern is that the speed at which this industry is moving, with the failure of the government to act as quickly, will have very severe repercussions for consumers this Black Friday, and this Christmas,” Stella Creasy, a U.K. parliamentarian who has repeatedly called for BNPL regulation, told The Guardian on Tuesday (Nov. 23).
Creasy, U.K. member of parliament for Walthamstow, added that before the pandemic, there were people crumbling under mounting debt and already struggling to cover their costs with credit cards and high-interest loans. “And into that picture has come a new form of credit, that is being aggressively marketed and shoved down their throats, without any protection at all,” she said.
She is not alone in her concern. Citizens Advice, a U.K. organization assisting people with legal, debt, consumer, housing and other issues, has also made calls for the sector to be regulated.
According to a research study conducted by the organization, 1 in 10 consumers will be relying on BNPL for their Christmas shopping, and 1 in 10 BNPL users — or 1 in 8 younger users — had been pursued by a debt collector over the past year, an indication that even though firms don’t charge any interest, it is not enough protection against the risk of late payment fees when borrowers are unable to meet repayment deadlines.
And their concerns haven’t fallen on deaf ears. Following the publication of an independent review in February warning that the sector represented a “significant potential consumer harm,” the government agreed to act, and the U.K. Treasury published a consultation setting out plans for the regulation last month, ahead of a separate consultation by the FCA.
According to The Guardian, Creasy said the lengthy timeline presents a high risk for young consumers, adding that by the time the consultations close sometime next year, they would have had time to take on millions of pounds more in debt.
Industry Leaders’ Take on BNPL Pitfalls
MP Creasy would find an ally in Aseem Munshi, CEO of London-based FinTech Updraft, who is determined to help remove the rising burden BNPL has put on U.K. consumers.
In an interview with PYMNTS this month, Munshi said there is an aspect of BNPL that could be helpful, “but I would argue [that] there’s very little utility in putting 30 pounds … on three installments of 10 pounds each.”
Read Munshi’s interview: Startup Updraft Uses Open Banking to Help UK Consumers Manage Credit Without the Credit Card
He added that one of the core issues he has with the product is whether people view it as a credit product, “which it truly is,” or as a means of payment which then leads to overspending, interest build up and ultimately mounting debt.
Michal Smida, founder and CEO of Twisto, a Czech-based firm and one of the leading BNPL firms in Central Europe, said Twisto embraces fit for purpose regulation in every market it enters, and has made it a point to uphold the standard of responsible lending which is popular across Europe.
Read Smida’s interview: One-Click Payment Experience Drives BNPL Adoption by European Consumers
According to Smida, the company, which operates in the U.K. and was recently acquired by global Aussie BNPL company Zip, protects users by complying with specific measures checking a public register for overdue payments or the amount of outstanding debt they have.
That information, he told PYMNTS, helps the firm to better understand the consumer and offer an acceptable credit limit (it can be increased over time) that would not put the individual in a difficult financial position.
Gary Rohloff, co-founder and managing director of New Zealand-headquartered firm Laybuy, said he also welcomes regulation, telling PYMNTS in a recent interview that the company is very receptive to “appropriate” suggestions made by the U.K. government.
Read Rohloff’s interview: Merchant Education Key to Buy Now Pay Later Adoption in the UK
He added that unlike credit card companies that are incentivized to allow consumers to keep spending so they can charge high-interest rates on their outstanding debt, Laybuy protects the consumer. “If you don’t pay your Laybuy installment, your account is suspended, you can’t keep shopping,” he said.
But Rohloff highlighted a misunderstanding around the debt risks involved when it comes to BNPL: “Our average order value is only 72 pounds (about $96) [so] you’re not talking about people racking up thousands of pounds of debt with Laybuy,” he noted. “These are smaller purchases paid off over six weeks, not large items paid off over three, four or five years.”