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6 Jan 2022

'It doesn't feel like you're committing to a credit agreement' - Which? calls for stronger safeguards for 'buy now, pay later' shoppers

In-depth interviews with BNPL users reveals a lack of understanding of the risks

Many 'buy now, pay later' (BNPL) users do not think they're taking on debt when deciding to pay later at the checkout, Which? research has revealed.

BNPL schemes offered by providers such as Klarna, Clearpay and Laybuy are a form of credit, allowing shoppers to pay for purchases in instalments or at a later date, interest-free - and usage of these products have soared during the pandemic.

But our research, carrying out in-depth interviews with 30 'buy now, pay later' (BNPL) users, has raised concerns that many shoppers don't fully understand the risks of choosing a BNPL option at the checkout

The interviews revealed many did not think of BNPL schemes as a form of credit, meaning 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.

Which? is calling for stronger safeguards to stop online shoppers from choosing BNPL without understanding the risks.

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BNPL mistaken as a 'money management tool'

We carried out in-depth interviews with 30 typical BNPL users to explore their understanding of 'pay later' schemes.

Concerningly, a sizeable proportion of participants didn't see BNPL as a form of debt.

Instead, participants described the schemes as a 'way to pay' or a 'money management tool', rather than a credit provider.

One user told us: 'It allows payments to be spread out for budgeting. It made things possible which in one go would have been extremely difficult and I would have probably had to borrow money from elsewhere.'

Though BNPL schemes are a form of credit, they work differently compared to more traditional methods of borrowing such as credit cards. Not all BNPL schemes run hard credit checks, for example, and you can normally sign up to a BNPL scheme in a matter of clicks.

Our research found it was precisely this speed and simplicity when selecting BNPL at the checkout that contributed to users' misunderstanding.

'It seems really convenient and no hassle,' one user explained. 'It just asks a few questions so it doesn't feel like you're committing to a credit agreement.'

Low engagement with terms and conditions

Our research also revealed a low engagement with BNPL providers' terms and conditions.

Most BNPL users said they either skimmed the T&Cs or simply ticked a box to say they'd read them in full.

As a result, some of the users we spoke to had a limited understanding of the consequences of missing payments, and the safeguards and checks carried out by BNPL providers.

Some participants were not aware there were late payment fees at all.

The users we interviewed also tended not to question the nature of BNPL products until we prompted them to consider the schemes more closely.

Their comfort with using BNPL, and the speed of signing up to one, was often based on an assumption that safeguards were in place when using them, and that someone else was taking steps to ensure they couldn't get into serious financial difficulties.

Affordability distortion

Some of the BNPL users we spoke to lacked access to alternative forms of credit, either due to previous debt problems or not wanting to use traditional credit again after past experiences.

Some of these users told us BNPL was a way of making purchases that would otherwise be unaffordable, result in high-interest payments, or take a lot of time to save for.

As BNPL schemes aren't currently regulated by the Financial Conduct Authority (FCA), BNPL providers don't have to undertake a credit affordability assessment before allowing consumers to use their products.

Many popular BNPL schemes only run 'soft' credit checks before lending to customers, which checks basic information such as your name and address but doesn't check your other debt commitments.

Without these proper credit checks, consumers could be putting themselves at risk by signing up to BNPL agreements - leading to people borrowing more than they can afford to repay and marked credit reports if they fail to make a payment -making it more difficult to borrow in the future.

'It almost doesn't feel like I'm blowing £100 on shoes,'

Throughout the research, we found that BNPL users don't consider the prospect they might struggle to make repayments.

In fact, using BNPL schemes made some consumers feel less concerned about making purchases they wouldn't otherwise view as necessary or affordable.

'It softens the blow psychologically. It almost doesn't feel like I'm blowing £100 on shoes,' said one participant.

BNPL users frequently assumed that providers carried out some sort of affordability check, when in fact, in lieu of regulation, BNPL schemes aren't required to assess affordability before lending.

This means consumers have to judge their own affordability limits - but this process is often distorted by our own biases which cause us to underestimate the likelihood of negative events, and assume we have greater control over external events.

In the context of BNPL, users' biases meant they considered it highly unlikely that something would happen to disrupt their ability to make repayments. Users considered their BNPL purchases affordable, even if they couldn't buy them outright, because they were confident their circumstances wouldn't change.

Other participants we spoke to were in fact struggling to juggle repayments.

A false sense of security

Person shopping for a baby carrier online

Several of the BNPL users told us they hadn't set out to use a 'pay later' scheme, but ended up using one when they saw the retailer offered it at the checkout.

'You put things in your basket and it says payment method and it says pay with Clearpay and you just think “why not?”' said one user.

A previous Which? investigation found that online retailers are bombarding shoppers with BNPL ads on the journey to the checkout, often with sparse information on how the schemes work in terms of repayments, late fees and credit checks. More than half of the 111 fashion, baby and child, and homeware retailers we looked at offered at least one BNPL scheme, and nearly 70% offered more than one.

For other participants, BNPL schemes offered a false sense of security when shopping online. A participant told us: 'If I see something has Klarna on, I probably trust it more. I just think like why is it going to let you buy something and have it before you've paid if it's not legit?'

But another Which? investigation uncovered more than 170 retailers, offering either Klarna, Laybuy or Clearpay, with T&Cs in breach of consumer law on their sites.

BNPL users could find themselves in sticky territory if they run into problems with the retailer they've ordered from - as BNPL schemes aren't regulated, users don't benefit from additional protections such as Section 75 that are guaranteed with credit card purchases. Those paying with BNPL schemes also won't be able to complain to the Financial Ombudsman Service (FOS) if something goes wrong.

Concerningly, some of the participants we spoke to wrongly assumed the schemes were regulated and were shocked to find out they weren't: 'I am surprised, I am shocked, they should be regulated. If you have a service that is not regulated you have no protection for consumers,' one participant said.

Which? calls for stronger safeguards to protect consumers

This lack of understanding around BNPL products is particularly concerning given our research that found people are more likely to be using BNPL at stressful and challenging times in their lives.

Missing a credit repayment or bill or experiencing a major life event - such as getting married, having a baby, moving home or being made redundant - increases the odds of using BNPL by around a third.

Which? is calling for stronger safeguards to protect consumers, including steps in the checkout process to ensure people understand they are borrowing money when using BNPL, and warnings about the risks of using the schemes.

Key information, such as payment terms, late fees and the potential consequences of missed payments, should be communicated at the point of transaction to help consumers make informed choices. Given the immediate risk, BNPL providers should proactively make their key terms and conditions more accessible, rather than waiting for regulation.

Affordability assessment should also be carried out for all BNPL transactions ahead of regulation being introduced.

Which? wants no delay in regulating these schemes to ensure those who use them are properly informed and protected.

Find out more: listen to experts behind the research discuss our findings in more detail plus what BNPL providers had to say in the latest episode of the Which? Money Podcast