One in ten UK shoppers who choose to pay for products using buy now pay later have been chased by debt collectors, amid exploding demand for the services since the onset of the pandemic.
The proportion of buy now pay later (BNPL) shoppers that have received contact from or been referred to debt collectors rises to one in eight amongst 18 to 34-year-olds, who have been particularly keen to adopt the form of credit, according to new report from Citizens Advice.
BNPL enables buyers to delay payment with no incurred interest, for up to 30 days after purchase, or alternatively to spread repayment across six weeks to four month installments.
But those who miss payments are often subject to late fees – and the latest research shows BNPL shoppers in the UK have been charged around £39m in late fees in the past year.
BNPL services have grown rapidly during the pandemic thanks to their popularity among online shoppers, and the market swelled to £2.7bn last year.
But it has come under fire from campaigners warning that it can encourage consumers — particularly younger shoppers — to rack up debts.
The sector is not currently regulated and relies on an exemption from consumer credit rules, though this has led to inconsistent practices.
Crucially, the new research found that only 11 per cent of BNPL services warned shoppers they were taking out a credit agreement. The remaining 89 per cent included this information in small print or in the T&Cs.
Citizens Advice called for regulators to urgently address the sector and crack down on services to ensure consumers are clearly notified that they are entering into a formal credit agreement.
Dame Clare Moriarty, Chief Executive of Citizens Advice, said the warnings should be “unmissable.”
“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,” she said.
“The Buy Now Pay Later industry has exploded and we need consumer protection to keep up with the changes in the way we live. We hope the Treasury can keep pace.”
As part of the report, Citizens Advice asked key players in the BNPL sector if they had ever referred customers to debt collectors. Klarna, Clearpay, Laybuy and Openpay confirmed they do so “as a last resort.” Splitit said it does not, and PayPal refused to comment.
It comes a couple of weeks after PayPal announced it will stop charging late fees when customers miss payments on buy now, pay later (BNPL) purchases worldwide, in an effort to attract customers amid booming market competition.
PayPal’s latest move was a clear tactic to attract online shoppers to its service over competitors such as Klarna, which recently scored a $45bn valuation, and Clearpay.
Startups in the space have urged caution over the FCA’s plans to introduce regulation to the sector when it carries out a consultation in the next few months.
In a recent report, the Coalition for a Digital Economy (Coadec) hit back at the idea of “hard credit checks”, calling instead for proportionate affordability tracking.
It said new regulations should target providers rather than retailers and called for tighter consumer communications and a better redress model for complaints.