As a new generation of buy now pay later credit providers enjoy record business in lockdown Britain, debt experts warn of a “sleepwalk into debt” that’s particularly affecting young people.
Buy now pay later (BNPL) has evolved. On the high street and online, it’s no longer just purely about big ticket items. Consumers can take advantage of BNPL clothes and shoes, fragrances, toys, games and much more. And there’s one name above all others driving the boom: Klarna.
Klarna and the many other operators following in its wake offer a form of BNPL credit without the credit card. App based, shoppers can spread the cost of purchases in an instant. Short term payment plans of between 30 days and six months are often interest free. There are no hard credit checks and some lenders promise no late payment penalties.
During the pandemic the use of BNPL apps has increased by 35%. Klarna alone saw its users grow from 7 million to 10 million in 2020. Competitors like Zilch, Laybuy and PayL8er are also enjoying major growth. The industry has been described as being in a ‘land grab’ to sign up retailers to BNPL platforms.
But the Klarna generation skews young. Marketing strategies that have proved particularly popular with millennials and Gen Z have led some industry commentators including financial campaigner Martin Lewis to criticise the industry. ““Buy now, pay later shouldn’t be sold as a lifestyle choice, something cool, or a new hi-tech way to pay. It should be seen for what it is – a debt,” he told The Guardian. Labour MP Stella Creasy described BNPL companies as “the next Wonga waiting to happen” in reference to the now defunct payday lender.
A spokesman for finance comparison site Finance.co.uk acknowledged a growing wariness about BNPL companies, but saw the companies working hard to avoid payday loan comparisons. “The sheer number of safety measures employed across the industry puts this generation of BNPL company in a different class to the payday lenders of a few years ago. Lower credit limits, late payment ‘snooze’ facilities, upfront interest charges (where applicable) and the freezing of accounts where payments slip – all measures employed by at least one BNPL app – make it considerably harder for customers to rack up the sort of debts notorious with payday lenders.”
The evidence supports this. The FT reports Klarna’s default rate is less than 1%, lower than the rate for the average credit card. And whilst many in the industry are calling for greater regulation, so are the BNPL companies.
Yet for debt management specialist Scottish Trust Deed, there’s a growing sense of unease about the access to money offered by the BNPL companies. “BNPL requires only a soft credit check, so it’s very easy to get,” said a spokesperson for the company. “Data from Which? shows about a quarter of people spend more than they intend to with BNPL. And without a credit check, there’s nothing to stop you signing up to all the BNPL companies if you wish.
“It’s currently an unregulated market and whilst the BNPL companies are trying hard to stress their ethical credentials, there may be late fees and there may be interest payments (depending on the lender you choose). It is still possible for debt to grow, and at a dangerous time economically for so many people, that has to make you wary. It does feel as though we could be sleepwalking into another major debt crisis.”