Citizens Advice reveals dark truth about buy now, pay later as young customers stuck in financial quicksand

Survey finds one in 10 customers, and one in eight young customers, referred to debt collectors as Britons rack up £39m in late fees. Regulation is sorely needed but there’s been radio silence from the Treasury, says James Moore

People can very easily get in over their heads with devastating consequences (Getty/iStock)

Looking at the latest Citizens Advice (CA) research on the subject of the booming buy now, pay later (BNPL) industry, I was struck by a sudden sense of deja vu.

It was almost as if I’d stepped into time machine and found myself back in middle of the payday loans scandal, which left a trail of misery and financial devastation in its wake.

Ridiculous? An exercise in absurd hyperbole on my part? That’s what the comparison would appear to be if you were to take a cursory look at the industry’s leading lights.

These operations don’t look anything like payday loans companies. Not even close.

The latter liked to charge four-figure APR equivalent interest on their short-term loans. BNPL operators don’t usually charge any interest at all, at least not on their plain vanilla products, which let people pay after 30 days or via a small number of monthly instalments (commonly three).

The rates can be quite competitive for the longer-term credit some of them offer. Industry heavyweight Klarna, for example, quotes an APR of 18.9 per cent for repayment over periods of between six and 36 months. That compares very favourably with the 21.9 per cent Barclaycard says it offers to “most accepted customers”.

But bear with me. There is method in my madness. You see, a loan is still a loan even if it’s just for 30 days, and even if there’s no interest charged on it (BNPL companies make most of their money from the retailers whose sales they increase).

Borrow enough via loans and you’re going to find yourself in a world of pain if you can’t pay them back, regardless of the interest rates charged.

The big problem with BNPL products is that it can be very easy to end up in that world, partly because they don’t look like loans, most of which impose hard credit checks and feature prominent warnings about the risks of not repaying the money.

This explains the startling – and disturbing – findings uncovered by the CA research. It includes that as many as one in 10 BNPL shoppers have been chased by debt collectors, rising to one in eight young people, who are the primary users of these products and the principle subjects of their marketing.

Citizens Advice also found users were charged a staggering £39m in late fees during the past year. Goodness only knows what this year’s figure will look like given the speed at which the sector is growing (the number of BNPL transactions trebled in 2020 alone).

There’s more: some 96 per cent of those referred to debt collectors by BNPL companies suffered negative consequences including sleepless nights, the ignoring of texts, emails and letters in case they were about debts, avoiding answering the door, mental health problems and, perhaps worst of all, borrowing still more money to repay their BNPL debts.

That there is where my comparison to the payday loans scandal starts to look more valid. Problems like those were all too common before regulators brought the hammer down.

Needless to say, the charity found that not one of the BNPL checkouts on leading retailers’ websites researched as part of a mystery shopping exercise warned people they could be referred to debt collectors for missed payments.

Of course they didn’t. These products aren’t supposed to be seen as loans. They are, rather, your friendly personal finance friends that won’t affect your credit rating – BNPL providers stress that the “soft” checks they use are designed with that in mind.

And yes, people can find them very useful. Those who buy their clothes online typically like to order multiple items to try on before sending back the ones that don’t fit or they don’t like. To do this, they have to shell out a lot of money upfront and refunds take time to process, which can leave a nasty hole. BNPL companies solve that problem.

But Citizens Advice says they carry the risk of “financial quicksand” – online spending that’s easy to slip into but difficult to get out of. In fact, it describes this as “a deliberate design feature” of BNPL products. And I think this is on the money.

The research makes it all too clear that these products can have a nasty sting in their tail, as is frequently the case with easy credit. People can very easily get in over their heads with devastating consequences. Just as they did with payday loans.

Back in February, the Financial Conduct Authority published a report on the unsecured consumer credit market that found a “strong and pressing case to bring BNPL business into regulation”. In its recent business plan, the watchdog said it expected to consult on new rules in 2022.

The problem is, the timetable is in the gift of the Treasury which has to come up with a framework before the FCA can act. The Treasury has agreed that regulation is a good idea. But it’s been a case of radio silence since then.

The research rather suggests that the minister concerned, John Glen, the economic secretary to the Treasury, needs to buy himself some skates and then get them on.

PS: I’m not about to suggest that he should use a BNPL firm.