Buy now pay later firms: How do they work and who uses them?

The buy now pay later (BNPL) market has exploded in popularity as more people have turned to shopping online during coronavirus lockdowns.

Shoppers buying everything from fashion items, to gadgets, sporting equipment and household goods may be presented with a range of slick and easy options to spread the costs with a few clicks – even though they may have originally been planning to pay in full.

BNPL options are facilitated by companies such as Klarna, Clearpay and Laybuy.

Here is a look at how the buy now pay later sector works:

– What is buy now pay later?

Such schemes allow people to spread the costs of products over a longer period, rather than paying immediately in full.

In most cases the service is free to the consumer, as long as repayments are made on time.

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Online Retail Stock

– What are the benefits of using such schemes?

For consumers, it may work out much cheaper to split the cost into interest-free payments, rather than turning to more expensive borrowing options.

– How quickly is the market growing?

The sector makes up around 1% of the total credit market but it
has accelerated very quickly and is still growing.

The total market was worth around £2.7 billion in 2020, although as products do not currently fall within the Financial Conduct Authority’s remit, it has been difficult to estimate the scale of the market.

Growth in the value of BNPL transactions nearly quadrupled between January and December 2020, with usage spikes coinciding with lockdowns last year.

Some consumers have reported that they were using BNPL products to manage their finances because of the financial distress during the coronavirus crisis.

– Who uses BNPL schemes?

An estimated five million people have used a BNPL product since the start of the Covid-19 outbreak.

According to the Woolard Review, which has looked at such schemes as part of a wider study, around 25% of users are aged 18 to 24 and 50% are aged 25 to 36.

Three-quarters (75%) are female and 90% of transactions involve fashion and footwear.

– What do the firms involved do?

Firms providing such products tend to be relatively new and technology-driven.

They partner up with retailers to give consumers access to services which help them manage their finances, without having to undertake detailed or formal application processes.

– How are the costs borne?

Retailers will pay a percentage to BNPL lenders, on the basis their services will help drive sales. Shoppers may end up buying more if there are options to spread the costs.

People may also need to pay late fees, which can vary, if they cannot keep up with repayments.

For example, the Woolard Review found for orders under £24, Clearpay may charge a late fee of £6. For orders over £24, fees are capped at 25% of the original order or £36, whichever is less.

Klarna will try to take funds after seven days and again after a further seven days. If payments remain outstanding, debts could be passed to a debt collection agency.

Laybuy charges £6 after 24 hours and a further £6 after seven days.

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Faux fur advertising

– What are the risks to consumers?

The review said products are often seen by consumers with a poor credit history or thin credit files as a viable alternative to more traditional forms of regulated lending.

Because such activity is not generally recorded by credit reference agencies, it can be easy to accumulate £1,000 of debt without this being visible to other lenders, the review found.

One in 10 customers of one particular bank were already in arrears when they used BNPL.

Consumers’ understanding of such products also varies widely.

They may also be presented with multiple BNPL options on a single website, which can add to the confusion.

Firms are now going to be brought under Financial Conduct Authority (FCA) regulation, in order to better protect customers.

– How will bringing firms under FCA regulation help consumers?

The reforms should pave the way for more rigorous affordability checks, ensuring people are not taking on too much debt.

Customers will also have more uniform access to forbearance schemes if something goes wrong and they will have an outside body to complain to – the Financial Ombudsman Service.

– Why do some firms’ activities currently fall outside FCA regulation?

Exemptions were made in consumer rules going back to 1974 but the review said they were never intended for these kinds of products.