Is BNPL exposing consumers to the risk of debt?

By Gaia Lamperti

‘Buy Now Pay Later’ (BNPL) services have gained momentum this year, attracting more and more customers while closing record deals like Square’s acquisition of Afterpay.

Yet, much of the BNPL market still faces regulatory battles with legislators seeing instant loans without traditional checks as a slippery slope into debt. They are not too far from reality, as research offers evidence of the risks such popular services come with.

According to a report by UK charity Citizens Advice, 1 in 10 BNPL shoppers has been chased by debt collectors, a figure that rises to 1 in 8 when it comes to young people. The charity’s study showed that consumers who bought in instalments were charged £39 million in late fees in the past year.

Yet, none of the services they used warned people at the checkout that they could be referred to debt collectors for missed payments, Citizens Advice found. While conducting mystery shopping the charity also found out that of the merchants offering BNPL, only 11% warned shoppers they were taking out a credit agreement, the remaining 89% put this information in the small print or T&Cs.

Citizens Advice is now calling on the Treasury to urgently regulate BNPL out of concerns that shoppers have been left unprotected and not informed properly during the rapid expansion of the sector and people who opt for BNPL might not understand the consequences of doing so.

Negative effects of missed payments

The charity interviewed some of those who were referred to a debt collector for missed payments, and it resulted that 96% of them experienced negative consequences for having missed payments. They reported at least one of the following: sleepless nights; ignoring texts, emails and letters in case they were about debts; avoiding answering the door; borrowing money to repay the debt; or their mental health getting worse.

“My concern is that people aren’t processing the fact that BNPL is credit. They don’t realise there are going to be consequences if they don’t pay – it gives them a false sense of security,” commented Millie Harris, a Debt Adviser at Citizens Advice East Devon. “I’ve seen people using it for their kids’ clothes and shoes that they would otherwise never be able to afford. They are taking out what is effectively a loan, but they don’t see it as one. For example, I helped someone who has tens of thousands of pounds of debt, but they don’t see Buy Now Pay Later as part of that total.

According to Dame Clare Moriarty, Chief Executive of Citizens Advice, the responsibility should be of the service providers and merchants. “The sheer number of shoppers facing debt collection is startling. We know from our frontline advisers just how much stress this can cause. A seamless Buy Now Pay Later checkout process should not mean shoppers have to dig around in the small print to find out they’re taking out a credit agreement and could be referred to debt collectors if they can’t pay.”