City thinking, local knowledge

Does the Buy Now, Pay Later market need more regulation?

By Questa Chartered

More and more of us are taking advantage of services such as Klarna, Laybuy and Clearpay, so we can pay for purchases in instalments interest-free over a set period. But as the buy now, pay later market grows, is it time for it to be more heavily regulated?

Citizens Advice certainly believes so, as it’s calling for affordability checks to be carried out across the whole market and clear information for consumers at checkouts.

This came after a study by the group found that more than one in ten people who use buy now, pay later services didn’t fully understand how the repayments would be set up. This lack of understanding may partly explain why so many are borrowing money to make repayments and falling into serious debt.

In fact, Citizens Advice research found that more than two-fifths of customers who’ve used buy now, pay later services have borrowed money to make repayments. While many turned to friends and family for financial help, some also opted for overdrafts, loans and payday loans. And significantly, more than a quarter turned to their credit cards to repay what they owed.

Young adults were found to be especially likely to borrow money in order to pay off buy now, pay later purchases. In fact, 51 per cent of adults aged between 18 and 34 borrowed money to pay off this debt, compared with 39 per cent of 35- to 54-year-olds and 24 per cent of over-55s.

Commenting on the findings, Dame Clare Moriarty, Chief Executive of Citizens Advice, said: “Shoppers are piling borrowing on top of borrowing, and sinking into ever more desperate situations that can feel impossible to escape from.

“The spiral of debt from buy now, pay later to credit cards, loans and even payday lenders shows it’s not a risk-free alternative. Buy now, pay later is part of the credit industry and must urgently be regulated as such.”

What does the industry say?

Responding to the findings, buy now, pay later company Clearpay said 90 per cent of Clearpay transactions across the globe are made with a debit card, while 95 per cent of instalments are paid on time.

This, it said, demonstrates that its customers “use their own money to pay for purchases and that they understand how our repayments are set up”.

Clearpay went on to insist that it has always supported the introduction of “fit for purpose” regulation for the market that “protects the customer, and that it will continue to work closely with regulators and the industry”.

“We look forward to HM Treasury’s decision on the matter,” a spokesperson added.

But despite Clearpay’s apparent support for better regulation of the market, Citizens Advice remains concerned about the impact it can have on consumers.

“What scares me most is how easily people can slip into using buy now, pay later,” said Millie Harris, a debt adviser at the charity.

“They come to rely on it much more quickly than other forms of credit. It’s just a few clicks at a checkout. Too often that means people don’t realise how serious it is; that it is credit and there are consequences if they don’t repay it.”

The soaring popularity of buy now, pay later services and the ease at which customers are slipping into further debt as a result of using them highlights a key issue.

Many people are making financial decisions and putting themselves at financial risk without looking at the bigger picture.

Are customers who take out payday loans and rely on credit cards to make repayments even thinking about the consequences, such as what it’s doing to their credit rating and their ability to take out a mortgage?

Perhaps better financial education is the key, so people are able to make smarter, savvier decisions with their money, and avoid consequences that could affect them for years to come.

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