By Jess McGuigan, Wealth Planner at Kingswood
The Buy Now Pay Later (BNPL) Market has hit the targeted Millennial & Gen Z generation by storm. The media is raving about BNPL, and Venture Capitalists are looking for the next Klarna or Afterpay to invest into. More and more financial institutions are enabling BNPL as part of their credit card offerings, with some of the largest retailers and merchants also jumping on board. According to recent studies, the industry has been growing by nearly 40% year by year, fuelled by the younger generation’s wants for instant gratification and desire to keep up with the latest trends on Instagram and Tiktok. But do we all truly understand how these BNPL plans work, and more importantly, the dangers? Are these schemes regulated?
There are many variations of Buy now Pay Later, but the main ones allow you to select a BNPL service at the point of sale, to spread out the purchase price interest-free over several instalments, or delay the payment for 30 days, making it ideal for many customers who wish to delay paying straight away, or can’t afford the item in full at that point. Klarna, one of the leading BNPL in the UK, boasts over 500 million customers and partnerships with over 5000 retail merchants, with more and more being added regularly.
So, what is the appeal of these BNPL schemes? Let’s take Klarna as an example. Klarna promises there is “always” no interest, no fees and no late payment charges. There is no complicated account sign-up, and no hard credit check appears on your credit record. The company makes its money by charging the retailer rather than the customer. Smaller shops pay as much as 5.4% plus 20p for each sale, although big companies pay less. It is considered “ideal” for the fast fashion trend, as shoppers can order multiple outfits at once, knowing their card won’t be debited, refunding any that they wish to return within the 30 days and pay the outstanding money for the clothes they keep.
BNPL markets itself as the new convenient way to pay for goods that shoppers want – so you get the goods immediately. But along with convenience, there’s a bigger worry to consider: by encouraging you to defer payment at the time of purchase, there is the huge danger that when the time comes for you to pay, it may not be affordable. A recent report showed that the average user of BNPL between 18-24 owes £246.54 to these BNPL schemes, with age 35-44 users closely following with an average owed of £208.44. Whilst they can seem like an easy way to buy what you want and buy it now, for many it is an entry point into debt.
The most important development we’ve started seeing with BNPL schemes is the UK government’s plans to regulate them by 2023. It has already put in place a requirement aimed at protecting consumers from crumbling debt: since June 1st 2022, Klarna is required to share information with credit agencies on whether you paid off your BNPL loan on time, ultimately affecting your credit score. This ends up being a double-edged sword, as whilst this can have a positive effect on your score if you make your payments on time, miss a payment and it could negatively affect your credit score and ultimately ruin your chance of being approved for a mortgage. This is going to make it more important than ever to ensure you can meet your BNPL payments on time and avoid overspending to levels which you might not be able to afford.