This article is the latest installment of FT’s Financial literacy and inclusion campaign
In the age of mobile payments, Swedish group Klarna’s decision to launch its first physical card in the UK last month seems a bit outdated.
The pastel pink and black cards allow customers to make purchases – but delay payment for 30 days.
This is the latest development of the buy-now-pay-later (BNPL) phenomenon that has pervaded the UK, marketing itself as a healthier alternative to other forms of unsecured loans but fueling debt concerns when the cost of living increases.
Klarna, has 90 million customers in 17 countries and has worth 46 billion dollars in an investment round backed by Japan’s SoftBank last year, which has led to the UK boom over the past few years.
But the field is more crowded than ever. Digital banks Monzo and Revolut are testing BNPL features, while challenger bank Virgin Money launched an installment service late last year. In December, Barclays and Amazon announced the release of a BNPL feature called Installments for purchases of £100 or more.
The Financial Conduct Authority has estimated that £2.7 billion was spent through BNPL transactions in 2020. Researchers say the market has more than doubled – £5.7 billion – last year.
BNPL allows users to delay or split the cost of purchases without paying interest unless they miss payments; Some providers have even eliminated late payments or interest charges.
Almost all major clothing and footwear retailers now offer BNPL as a payment option on their websites. For example, Klarna’s partners include JD Sports, Nike, H&M, Hotel Chocolat and Ray-Ban. The service is also popular in higher fare sectors such as home appliances and electronics.
Retailers pay a BNPL provider commission just as they would a credit card company’s conversion fee. For example, some – Next and Very – have launched copy products, such as Next3Step.
But the rapid pace of development and easy access to this source of finance have raised concerns that it will encourage young and vulnerable consumers to spend more than they can afford. especially in the absence of a credit check.
It comes as a sharp rise in the cost of living begins to squeeze household incomes, with UK consumers already having to contend with The highest inflation in 30 yearss and energy costs are set to increase further.
“Our research shows that many users do not realize they are in debt or consider the prospect of missing payments,” said Rocio Concha, director of policy and advocacy at consumer advocacy group Any warning?.
In December 2020, the UK’s Advertising Standards Authority banned some Klarna ads that “promote the irresponsible use of credit to improve people’s mood” and set out The guidelines require all suppliers to make it clear that BNPL is a type of debt.
Klarna said it has been proactive and significantly changed its advertising and influencer policies, and invested in KlarnaSense, a product designed to encourage responsible spending.
Other regulators are now scrutinizing the area. Treasury issued a consultation on BNPL market in October, will establish the scope of this year’s FCA consultations.
Elsewhere, managers have also suggested a tougher stance. In December, the US Consumer Financial Protection Bureau asked Klarna, US-based Affirm, Australia’s Afterpay and Zip teams, and PayPal to provide information about their business practices, with reasons for concern including debt accumulation and regulatory arbitrage.
According to the Bank of England, BNPL providers consider their services less demanding than credit cards, which charge an average interest rate of more than 20% per year.
In October, Klarna made the changes for its services in the UK ahead of an expected crackdown by regulators.
The company said it will introduce new wording to make it “absolutely clear” to customers to whom they are being given credit, with penalties for late payments. It also added a “pay now” option and a tougher credit check.
The company has said that the majority of its transactions are spent using debit, rather than credit, cards.
In a submission to the Treasury, Klarna described BNPL as a “lower risk inherently credit option”, while Alex Marsh, head of Klarna UK, said the consultation was “a step forward” important progress in regulating BNPL, which we have long called for”.
UK-based BNPL Zilch said: “Unlike credit card models that monetize late fees and interest, our model only works if the customer is able to repay the loan on time. ”
Anthony Stephen, chief executive of Barclays Partner Finance, last year launched a partnership with Amazon that would allow the retailer’s UK customers to split £100 payments over three to 48 months – but interest-free – said: “We believe all consumer loans should be regulated and subject to the same rules. ”
However, charities and financial advisors are still concerned about the risks posed to users.
The Center for Financial Possibility, a charity, found that almost a quarter of UK adults using BNPL services failed to make their payments on time, rising to 35% for those aged 18 up to 34 years old.
“These numbers reveal the truly shocking nature of this market that puts already vulnerable people at risk of bad debt,” said Carol Knight, a trustee at the charity. .