Frequent ‘buy now, pay later’ users more likely to be in financial straits

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Frequent users of “buy now, pay later” products are more likely to be in financial difficulty, the UK financial watchdog has found, as the number of people using the short-term method of credit jumped sharply.

Consumers who have used BNPL products more than 10 times in the past year were four times more likely to have missed paying a bill in three of the past six months, research from the Financial Conduct Authority has found.

The study found that 27 per cent of UK adults, equivalent to 14mn people, had used BNPL at least once in the six months to January 2023, a sharp rise from the 17 per cent who reported doing so over a 12-month period the previous time the survey was conducted in May 2022. 

“Our research shows a significant increase in the use of BNPL over the past year,” said Sheldon Mills, executive director of consumers and competition at the FCA, which has no oversight of the sector.

The findings will add to growing concerns about the lack of regulation. A review commissioned by the FCA almost three years ago found that regulation was “urgently needed” over concerns that providers were not adequately assessing customers’ ability to afford loans.

The latest study found that people with “characteristics of vulnerability”, including those in poor health or recently made unemployed, were among those more likely to use BNPL products. Nearly half of frequent BNPL users also have high-interest loans or credit card debt and have borrowed more in the past year, the FCA found.

Buy now, pay later companies such as Klarna, Clearpay, Laybuy and Openpay offer short-term, interest-free credit to consumers at the online checkout of retailers, allowing them to split the cost of purchases into several monthly or fortnightly payments, or pay in full at a later date.

Mills said BNPL products, which have become highly popular with fast fashion retailers and have expanded into areas including food delivery, could provide valuable benefits when used “appropriately”. But the watchdog wanted to ensure that vulnerable consumers “have adequate protections and are given sufficient information”, he added.

Regulators around the globe are increasingly scrutinising the sector. In Australia, where BNPL is particularly prevalent, the government announced in May it would bring the products under consumer credit regulation.

Earlier this year, the government published draft proposals that would give the FCA sweeping powers to clamp down on BNPL companies.

The opposition Labour party has accused the government of delaying plans to regulate the sector until after the general election, which is expected next year.

The Treasury said that regulation of buy-now pay-later products had to be proportionate so that borrowers were protected while still being able to access interest-free products.

“No decisions have been made as we are reviewing the responses to our recent consultation and will report back in due course,” a spokesperson said.