Do You BNPL? (Buy Now, Pay Later)
If you’re an online shopper, you have probably seen the name “Klarna” popping up on the payment pages of sites like TopShop and JDSports. It’s a lending bank branding itself as a smart, funky new payment option for those of us who just can’t wait til payday to buy that new pair of trainers.
Ring any bells?
Well it does to us: alarm bells. And we’re not alone. Marketing debt in a fun way to people on a low income (note it’s JDSports and not Golden Goose who are partnering with Klarna) such as students is a morally complex area, and one that the authorities are just wising up to.
Yes, after recent clamp-downs on payday loans and overdraft charges, the “buy now pay later” culture is the latest area of personal finance to feel the crack of the regulator’s whip: the Financial Conduct Authority has just announced that BNPL lenders will no longer be allowed to charge interest on this somewhat pernicious type of credit.
What does this mean for the purchaser? Well, before the new ruling, you might have paid nothing for your trainers for a stated period of, say, 6 weeks, but thereafter you’d be paying the money back at a seriously inflated rate, ending up as out of pocket as if you had bought those Golden Gooses. And even if you had managed to pay some of the money back within the agreed time, you’d still be paying extra on your final balance (let’s call it the New Balance, shall we, to stay the sneaker analogy) because the interest would be back-dated from the date you agreed to purchase the item.
So how many people are affected by this? And who are they?
About a third of all BNPL consumers don’t settle their balance within the agreed time, and many of them are using the “service” to pay for high value items like white goods, technology or travel. And they may well have been sold the scheme in a bricks-and-mortar shop at the counter when they go up to pay, so will feel under time and social pressure to accept it.
Obviously the fear is that many of these people are vulnerable shoppers. Touchy-feely Klarna have said that they would try to identify vulnerable customers and treat them with special care, but at the end of the day Klarna is a bank trying to make money and the customer is someone without much cash or financial nous, so it’s obvious where the power lies. With the new rules in place, however, it’s estimated that UK consumers could save £60m a year.
What’s really going on here?
Well, apart from the new generation of banks trying to convince millennials to trust financial services again after 2008 (and retailers who know that a BNPL offer will increase sales), there’s some deep psychological business going on: after all, the concept of “paying later” for your pleasure is one that has underpinned the Abrahamic religions, Buddhist karma and every child who has ever taken the “marshmallow” test, whether in a sociologist’s laboratory or at their mum’s kitchen table.
We humans are desperate for treats. Instant satisfaction is irresistible. And despite all the forces of reason and intellect (and the threats of God or moral philosophy), we continue to believe that we’ll be the lucky ones who get away without paying the price for our actions. This behaviour so ingrained in us, especially when we’re young, or our backs are against the wall and we can’t face the truth about how bad our situation is, that it seems almost innate. So we’re sitting ducks for companies who want to sell us credit.
And that’s why these new regulations, which are due to come in to force in November this year, are so important. Here’s what StepChange, the award-winning debt support charity, has to say on the matter:
“The FCA’s changes are modest but welcome, though whether they will fully achieve the objective we would like to see that credit should always be “bought rather than sold” remains questionable. When people’s eyes are on the goods they want to buy, and the credit is being offered through the retailer, it is particularly important that the nature of the credit product being dangled as the means to the desired end is made unequivocally clear.
“It is positive to see the FCA banning the practice of backdating interest on any element of borrowing repaid within the borrower’s 0% interest period. Looking ahead, we would hope to see the FCA take a closer look at the ongoing use of discounts and incentives. We would like the FCA to continue to scrutinise the evidence of consumer harm in this area and ensure consumers are protected against poor practice.”
Collage with photo by Paul Gaudriault and Frankie Cordoba on Unsplash.