Despite the lack of regulatory oversight, the FCA has advocated for clearer terms in “purchase now, pay later” contracts. They cited research indicating that in the six months leading up to January 2023, 14 million adults, or over a quarter of the UK population, utilized this payment method.
A Surge in BNPL Adoption
A “significant increase” in the utilization of Buy Now Pay Later alternatives for item purchases has been observed, according to the finance regulator. Individuals who use the service more frequently are more likely to experience financial hardship.
Approximately 14 million individuals, constituting 27% of the adult population in the United Kingdom, made purchases using Buy Now Pay Later (BNPL) during the six months leading up to January 2023, as determined by an analysis conducted by the Financial Conduct Authority (FCA).
Compared to May 2022, 17% of adults in the United Kingdom reported using it within the previous 12 months.
Financial Implications for Frequent Users
Consumers can acquire merchandise on credit and repay it in interest-free installments by using BNPL.Prominent service providers include PayPal and Klarna.
Additionally, FCA research revealed that frequent BNPL consumers are more likely to experience financial hardship.
Individuals who had used BNPL on more than ten occasions within the previous year were found to be over two times more likely to also possess a high-cost credit product (48% of consumers) than those who had not used it (22% of those who had not used BNPL).
Furthermore, in comparison to non-users, users were almost twice as likely to have increased the balance of debt on credit products within the past year (51% versus 27%, respectively).
Default Rates and Consumer Protection
In three of the previous six months, 27% of BNPL adopters had defaulted on a payment for a bill or credit obligation, whereas only 6% of those who had not adopted the financing had done so.
Although the FCA lacks regulatory authority over these products, it has stated that it is advocating for increased consumer protection against “potentially unfair and unclear contract terms” in the industry.
Following concerns that customers of payment services PayPal and QVC were “at risk of harm” due to the drafting of certain contract terms, the FCA has collaborated with BNPL providers and issued guidance.
Both companies voluntarily simplified the terms of their continuous payment authority.
For millions of pounds, Buy Now Pay Later may appear to be a “very sensible option” for budget management, according to Sarah Coles, director of personal finance at Hargreaves Lansdown.
“However, it fosters a perilous inclination in others, motivating them to purchase items that are neither essential nor within their financial means.” Those who significantly rely on BNPL are consequently considerably more likely to engage in other concerning forms of borrowing, such as obtaining credit at a premium rate, allowing debts to accumulate, and failing to make repayments.
In a review of the unsecured consumer credit market, the FCA suggested incorporating unregulated BNPL products into its regulatory domain.
