Is buy-now-pay-later fair for consumers?

*Sponsored by Elmhirst Parker Solicitors

Buy-now-pay-later (BNPL) products have rapidly gained traction with consumers, with many of the world’s most popular online retailers partnering with providers to give consumers the option to pay in instalments.

The volume of online transactions almost quadrupled during the pandemic, increasing uptake of BNPL schemes to around £2.7billion in 2020 as people shied away from high-interest credit cards. Growth was particularly seen in lower-value goods and BNPL now encompasses most aspects of everyday life, from clothes and cosmetics to car repairs and flights.

With the current economic climate of the cost of living crisis, rising inflation and higher interest rates, BNPL will only become more attractive to those trying to keep their heads above water, especially in the lead up to Christmas.

However, most people would be surprised to know that these agreements are not currently regulated by The Financial Conduct Authority (FCA) because there is usually little or no interest and they’re paid off in less than 12 instalments over 12 months.

Unregulated credit lenders don’t need to perform credit checks, provide pre-contractual information disclosures, comply with advertising rules on financial promotions, or assess whether the applicant can afford the credit. Furthermore, consumers don’t have the usual full range of borrower protection so are unable to claim redress or make complaints to the financial services ombudsman.

There is widespread concern that BNPL agreements are potentially damaging to consumers, particularly the more vulnerable members of society. So, do consumers have difficulty understanding what they’re signing up for?

One of the major concerns is that many BNPL users don’t understand the risk and consequences of using BNPL. They don’t think of these schemes as a form of credit, instead viewing them as a money management tool to spread payments out for budgeting purposes. They’re easy to sign up for and don’t carry rigorous credit or affordability checks, with many users saying the speed and simplicity doesn’t feel like committing to a credit agreement.

However, this means they could unwittingly be exposing themselves to serious risks of missing repayments, such as late fees, marked credit reports or referral to a debt collector.

With the convenience of BNPL, it’s easy for consumers to get into a credit spiral of unmanageable debt by taking on agreements with various lenders. A quarter of adults using BNPL defaulted on a payment. In 2021, almost 20 percent of active credit cards had BNPL transactions, while others rely on overdrafts or borrowing from family and friends to make the monthly repayments.

Another contributing factor is that key terms and conditions aren’t always accessible on checkout. BNPL schemes are marketed at younger audiences, preying on their fear of missing out. Many lenders have apps and reward programmes that only encourage overspending or impulse buys. But while Gen Z are the most digitally savvy, they’re the least financially literate.

This lack of transparency and fairness in terms and conditions has led the FCA to use its influential power and the Consumer Rights Act to work with the four biggest BNPL providers, Clearpay, Klarna, Laybuy and Openpay. As a result, the FCA has secured changes to the contract terms that consumers must agree to when selecting ‘pay later’.

The BNPL providers have agreed to make the terms of the BNPL offering much clearer, particularly around matters such as contract cancellations. They have also committed to making terms and concepts easier to understand.

Some customers may be eligible for refunds where they have been unfairly charged. Laybuy, Clearpay and Openpay have agreed to change their late payment fee terms, and will also voluntarily refund customers in certain circumstances.

While this is a step in the right direction, there still needs to be stronger safeguards to protect consumers.

The government announced in June their plans for regulation. But as with many areas of the law, regulation takes time and it will be from mid-2023 onwards that we begin to see any statute changes.

Under the government’s regulation plans, lenders will be required to ensure loans are affordable, they are approved by the FCA, adverts and marketing and fair, clear and not misleading, and consumers are able to make a complaint to the financial ombudsman.