The FCA has published new research on Buy Now Pay Later (BNPL) usage which shows that BNPL was used by 27% of UK adults in the last 6 months of 2022.
That is a large increase – only 17% of UK adults had used BNPL in the 12 months ending May 22.
But if this is interest-free credit, does this matter? Other statistics from this research suggest that it does.
What is BNPL?
In this article, BNPL refers to the interest-free ways to spread the cost of a purcahse over a few payments, for example pay in three.
This is often offered as a way to pay by online retailers. In the UK the three largest BNPL lenders are Klarna, Clearpay and Laybuy, but there are other lenders including Paypal and Zilch.
The FCA calls this Deferred Payment Credit (DPC) to distinguish it from the older “Buy Now Pay Later” interest-free periods offered by many catalogues. These are often over 6 or 12 months and interest is added if you don’t repay the balance by the end of the period.
But no-one else uses the term DPC. BNPL is the common name so that is what I am using.
Why BNPL usage matters
Frequent BNPL users are more likely to be in financial difficulty
The FCA research looked at how often people used BNPL. 14% of people who use BNPL buy more than 10 things a year with it,
It then compared these “heavy BNPL users” with people who don’t use BNPL at all. The research found that the frequent users are:
- more than 4 times as likely to have missed bill or debt payments in 3 of the last 6 months;
- almost twice as likely to have doubled the amount of debt they have in the last year
BNPL usage won’t matter if other credit usage is dropping
Increasing BNPL usage won’t matter if other credit usage is dropping by as much.
So if you buy an item using Klarna instead of using a credit card, that’s good because you won’t be paying any interest, right? The problem is that is only true if you can manage to make the Klarna payments on time. And if doing this doesn’t leave you short of money so you use a credit card or overdraft more.
BNPL payments do not end up being interest-free if you then pay more credit card interest or overdraft fees.
The FCA research looked at how other credit usage – loans, cards, overdrafts – had changed after people started using BNPL. It found that:
- only 10% of BNPL users used other credit less
- 41% used other credit more.
This is in line with research into BNPL in America. That found on average starting to use BNPL causes rapid increases in bank overdraft charges & credit card interest and fees.
Shocking numbers – but not surprising
Debt advisers have been seeing an increase in the number of clients that have BNPL debts. And that this is also leading to other sorts of debt. Citizens Advice warned in 2022 that more than two in five BNPL customers had to borrow money to make the BNPL repayments
Regulation is urgently needed
At the moment BNPL lending is not regulated in the UK. Lenders don’t have to be FCA authorised, make affordability checks or report to credit reference agencies.
The Wollard Report highlighted this glaring regulatory loophole in 2020.
In 2021 the Treasury said it will bring in regulation and its consultation on draft legislation closed in April this year. But in July came rumours that the Treasury had decided to go slow on these changes after lenders had threatened to quit the UK market.
The major consumer and debt advice bodies were horrified. MoneySavingExpert, Which?, Citizens Advice, StepChange, the Money Advice Trust, and Christians Against Poverty wrote to the Chancellor urging him to go ahead with regulation as fast as possible:
With the mounting pressure of the cost of living crisis, the provision of interest free credit might look like part of the solution for people struggling with bills. But unaffordable credit which can lead to spiralling debt is never a solution.
Since then, nothing has happened. This new FCA research is a reminder of why regulation is needed .
How much BNPL will be used this Christmas?
Will statistics in 2024 show this fast-growing market has continued to expand?
No regulation will in place this Christmas.
Which is of course what the retailers and BNPL lenders want. The BNPL lenders pitch to online retailers is include us in your payment options and see your sales increase.
That spread the payment option will look so tempting to so many. But taking it will also lead to a very difficult start to 2024.
Options when you cant pay bills & debts
Card & catalogue affordability complaints
Mortgage problems? what are your options
Dean Russell says
I always believe Catalogues, either BNPL or just ordering are sometimes unfairly judged
There are credit limits
No issue in returning faulty goods
Allows people to buy items who are struggling to make ends meet
Sometimes over regulation financially excludes people
Sara (Debt Camel) says
Catalogue BNPL is rather different – you have much longer to repay the purchase amount, they are regulated so there should be affordability checks and they are reported to the credit reference agencies.
It is the new style “pay in three” that are rapidly growing and leading to increasing debts, not helping excluded people.
Katie B says
BNPL is just to lure clients who could normally not be able to afford the purchase. But as a result they end up buying more and just getting into more debt.
FCA did bring the lending without due diligence but who enforces it???
Before you know it you can’t keep up with any payments and it’s all your fault not the irresponsible lenders who make way too much of your financial distress
Dean Russell says
So where do people are struggling purchase goods, i.e. white goods for example.? Your statement comes across as ensuring people are excluded. and forces them to look at worse sources of credit People have to be allowed to make their own decisions. in life. As far as i am aware there are a credit limits to monitor payments
Sara (Debt Camel) says
Well there is traditional BNPL from catalogues. And https://www.fairforyou.co.uk/.
But to be clear I have no problem with Klarna-style BNPL if the repayments are affordable. But many people simply can’t afford to pay for white goods in a couple of months.
Rach says
I think people saying about white goods is unfair. Replacing those when broke are often a necessity. Offering bnpl on things such as make up and fast fashion is pushing wants. I was once offered bnpl on paypal credit when ordering pizza once. That should not be allowed.
John says
Is anyone seeing problems with BNPL when completing a DRO?
Sara (Debt Camel) says
are you asking if debt advisers are seeing problems? Can you be more specific?
John Mccormack says
Sorry Sarah. What I meant was as an intermediate I am seeing clients who have these mostly Klarna and clear pay debts. When I have looked at these companies they have a tiered type payment system such as pay a third on receipt of goods then 2 further payments later on. Our clients are becoming more and more reliant on this type of credit as the use it for living expenses (also with Christmas just round the corner). I know that under Rule 9.3(10) of The Insolvency (England and Wales) Rules 2016 provides that a client may choose whether to list a debt that has not yet fallen due. Therefore a lot of my clients don’t want to include them however my concern is that they are just stacking up debt that will become due during the moratorium period. My aim as a debt adviser was always to get clients out of debt so they can budget to ensure that they can stay debt free from that point. I have spoken to shelter and I am fully aware of the rules it just goes against my instincts. I do know its a big thing at the moment I was just interested what other advisers are feeling or finding.