‘Buy Now, Pay Later’ schemes are more prevalent than ever, but should they remain unregulated? – Liberal Article
If you have purchased anything online in the past year then you recognise the company name ‘Klarna’. If you are 25 or under, then chances are you are very familiar with their offering. They – along with a handful of other Fintech start-ups – offer ‘Buy Now, Pay Later’ (BNPL) schemes for millennials.
“What, like credit cards?” “Well, yes, in a sense, but also, no, not really.” An exert from a conversation trying to explain to my father the dangers of this new phenomenon.
On the surface, this new generation of companies is like any other credit giving scheme. The ability to ‘buy now, pay later’ isn’t new.
But what is new, is that Klarna’s service is free of interest and fees to the consumer. There is also no need to set up an account. So, how do they make money? Klarna charges retailers a fee and % of sales. Claiming its alternative payment option will boost sales and average spends.
Klarna pops up next to PayPal and other traditional payment methods in your online shopping cart. You input a few basic details (name, address, DoB, phone number, etc.), and before you can stop to think, your next ASOS haul is en route.
No lengthy background checks. No pages of terms and conditions to scroll through. Just Klarna, your ‘pal’, helping you until payday hits. That’s part of their carefully curated persona, branding themselves as a harmless alternative to paying upfront for goods.
Klarna and other companies are not your friends. Their laissez-faire approach to giving consumers the terms and conditions is used to reinforce the idea that there is no risk in using their product.
Along with this, they are marketing to young, less financially savvy, individuals who are often desperate to keep up with the new trends. Recently Klarna partnered with Love Island stars. Cleverly dressing debt up to be something harmless and even desirable.
In Australia, where these schemes have been available for much longer, a recent investigation highlighted lots of areas for concern. These services can lead younger consumers to “become financially over-committed”. Resulting in late fees and lower credit scores in the future.
It seems that even if a consumer did search for the ‘terms and conditions’ of the service they would not find a clear answer. Luke Griffiths, the general manager of Klarna UK, says “a customer’s credit score has not yet been impacted by using Klarna’s ‘pay later’ products even if they have failed to pay on time”. Whilst, in other statements the company has reported that all of its products can impact credit scores.
A Compare the Market investigation found that over 2 million adults have had their credit scores harmed by BNPL schemes. There is a clear lack of transparency over what these schemes entail. Even if consumers went searching for the terms, they would be left confused by numerous conflicting reports.
The lack of clarity emphasises my concerns about BNPL schemes continuing without stringent regulation. The FCA currently has no plans to regulate or investigate the market.
BNPL schemes have offered fantastic opportunities to reverse some of the consumer slumps we have seen in recent years. Also, there are obvious benefits of allowing people to buy essentials before payday. These are undeniable positives of such schemes.
There is nothing wrong with BNPL schemes if people fully understand the terms and conditions, and are able to pay back on time. But, due to the lack of regulation, companies can give information in a lacklustre and concealed manner. Meaning the consumer would have to search hard to find what they were actually getting themselves into.
This approach is even more concerning when it is young people (who are generally less financially aware) that these products are being marketed at.
Unless their hand is forced, these companies will not make clear the risk of using their services. After all, it would damage this friend-like character they have so carefully curated.
In this article, I have mainly referred to Klarna as it is the most prevalent company, but all other BNPL startups mirror their characteristics. Too often we see new technologies and start-ups causing damage because their innovation moves far faster than regulation. The FCA needs to step in and create a regulatory framework.
The age-old adage ‘some people pretend to be the beach, but they are actually quicksand’ is apt. The quicksand will engulf our young and vulnerable in disproportionate amounts if this market is not given stringent guidelines swiftly.
Written by Chief Liberal Writer, Olivia Margaroli
Point of Information
Would I still be buying this without Klarna? – a Conservative response
Ms Margaroli has written a fantastic article here. The dangers and repercussions of ‘Buy Now, Pay Later’ schemes are definitely something that we should be addressing more. Especially in the current economic climate.
Unfortunately, there is not much here that I disagree with here. I would, however, like to further address the damage schemes such as Klarna can have on younger adults. I completely agree with Ms Margaroli. These schemes are targeted at the less financially savvy and that this can lead to repercussions.
BNPL schemes are strongly encouraging rapid online spending. This can lead to young people happily spending money that they do not have, and may not even have in the future. Essentially these programs are giving vulnerable young people unlimited funds so they can stay up to date with the newest fashion and beauty trends.
Many BNPL companies such as LayBuy, Klarna and Clearpay offers its customers to spread a payment as little as £10 over a few months. If you are considering spreading the cost of £10 – a relatively small amount – you may want to think about whether this is really necessary.
How can these companies be offering this service, and still claim to be encouraging people to be wise with their money? The managing director of LayBuy, Gary Rohloff even went as far as to say “BNPL schemes can promote healthier spending habits”. However, I do not see how spreading the cost of £10 can be considered a healthy spending habit.
I do agree with Ms Margaroli in that in many cases these BNPL schemes can be incredibly useful for those who are fully in control and aware of the commitment that they are making. However, I do not think that these cases are common enough to require the need for schemes such as Klarna.
As much as it may seem like it, companies like Klarna are not there to do you a favour. They are there to entice you into a lifestyle of rapid online spending, which can get out of control.
These schemes are there to profit themselves and the retailers. Do not be fooled. In the end, the consumer will be the one who loses out. Next time ask yourself, would you really be buying that top without a Buy Now, Pay Later scheme? If not, you probably don’t need it.
Written by Chief Conservative Writer, Eleanor Roberts
Credit addiction is an illness – we must start treating it seriously – a Labour response
Not only is it Europe’s most valued fintech company but Klarna and the ‘Buy Now, Pay Later’ industry it represents has another prized accolade: it’s got all the Point of Information editors on the same page for once. I wholeheartedly agree that the absence of rules and regulations in the sector is leaving consumers without clarity. Moreover, I’m certain that’s only the start of the issue.
Even before the current crisis, UK household debt was staggering. The poorest 10% of households have debts three times larger than their assets. A decade of austerity has led to stagnant wages and unstable employment. Ultimately, it’s made far too many financially uncertain.
The sad consequence is that ordinary families are forced to borrow beyond their means. As millions have lost their livelihoods with the country in lockdown, the issue will only get worse. When the flow of cash dries up, no one is immune. So spending today and worrying tomorrow – what could go wrong?
We are facing a reckoning. Unregulated, Klarna and its ilk are enabling reckless habits among both consumers and represent risky income for companies. We should see addiction to credit and corporate greed as just two sides of the same coin, a currency spent on short-term ‘satisfaction’.
It’s there in the dopamine rush of the latest fast fashion purchase and the disgusting bonuses paid out to CEOs. Both are symptoms of an economic structure which prioritises unsustainable growth at the expense of everything else, be it health, happiness or the environment which houses us all.
And before what I’m saying starts to raise red flags for anyone (ones with a little hammer and sickle), I want to reiterate what Lily sets out above. Debt by itself is neither good nor bad. Carefully managed credit or loans can open up opportunities: for owning a home; for building a business; or even for paying the wages of nearly a quarter of the UK workforce.
But the necessary controls are sorely lacking in this area of our society, as they are in so many others. Regulation must be introduced because we can’t keep building our foundations on quicksand. We must do better. We simply can’t afford not to.
Written by Chief Labour Writer, Evan Saunders