The rapid growth of buy now, pay later services during the pandemic and their popularity among people facing financial challenges reinforces why there must be no delay to robust regulation of the sector, according to Which?.
Marketing and media portrayals of buy now, pay later firms have created a stereotype of the typical user – young women in their early twenties keeping up with the latest fashions by spreading the cost of their purchases, interest-free.
However, a new Which? report, including extensive in-depth profiling of typical users of buy now, pay later providers such as Klarna, Clearpay and Laybuy, reveals this portrayal is not the whole truth.
The consumer champion estimates that a third (33%) of the UK adult population have used a buy now, pay later product. While it is true that older consumers are less likely to have used buy now, pay later, it is clear that these services are not just being used by young people to keep up with fashion trends.
The consumer champion has found that some people are using buy now, pay later to access credit at stressful and challenging times in their life and may be experiencing harmful consequences as a result.
Respondents aged 39 or younger were more likely to report having missed a buy now, pay later repayment, while three quarters of those who had missed a payment had experienced a challenging life event in the last 12 months.
Which? analysis suggests those with dependent children are 71 per cent more likely to have used buy now, pay later, while having a household income of between £10,000 and £50,000 increases the odds someone will have used buy now, pay later by half (50%) when compared with someone who has a household income of less than £10,000. Households earning over £50,000 are a further 14 per cent more likely to have used it.
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 buy now, pay later by around a third (38% and 35%, respectively).
Buy now, pay later usage has grown rapidly during the pandemic as consumers turned to online shopping during lockdowns. Two in five (42%) of survey respondents who have used buy now, pay later have done so in the last year.
Despite using other forms of credit in the last 12 months, a quarter (26%) of respondents who have used buy now, pay later credit in the last 12 months have a pessimistic view of being able to cover an unexpected expense of about £500 using credit. This compares with just a fifth (18%) of the general population.
This raises concerns about the rigour of buy now, pay later firms’ affordability and credit checks and risks giving people a false sense of security about their financial situation if they are inappropriately cleared for buy now, pay later.
While four-fifths (81%) of buy now, pay later users had never missed a repayment, users of smaller buy now, pay later firms were more likely to have fallen behind – with up to a third (31%) of those who had used a smaller buy now, pay later provider missing a payment.
The report strengthens the case for greater regulation to ensure consumers are aware of the risks of buy now, pay later providers – namely that they could fall into debt and if they do, firms may take action.
Which? believes buy now, pay later firms should be more transparent about the risks of using their services and provide upfront information about late fees and what consumers can expect if they miss a payment.
Mandating credit checks before a user is approved and ensuring that providers communicate with each other so that an individual is not able to miss payments with one firm and then take out an agreement with another company would also help prevent consumers from getting into financial difficulty.
Rocio Concha, Which? Director of Policy and Advocacy said:
“Our research challenges the stereotype of buy now, pay later as a product used by Gen-Z and millennials and shows it is also popular with more affluent consumers, people with families and those who are facing financially challenging times.
“Our findings raise concerns that buy now, pay later users might not be fully aware of the financial commitment they are signing up to – putting them at risk of accumulating a big debt.
“There should be no further delay to plans for regulation, which should include much greater marketing transparency, information about the risks of missed payments and credit checks before consumers are cleared to use buy now, pay later providers.”