Buy Now, Pay Later providers bite back to debt critics

Buy Now, Pay Later (BNPL) services are becoming synonymous with debt. These services have come under fire for misleading consumers and putting vulnerable users at risk. Regulatory crackdown has loomed on the horizon for some time now, but what do BNPL companies have to say for themselves in the meantime?

BNPL solutions have soared in popularity in recent years, enticing customers at online check outs to spread cost of their basket over a period of time, rather than paying the full price upfront.

The momentum of growth in these services shows no signs of abating. Leading BNPL provider Klarna reported a record 20 million users in the US, with 4 million monthly active users – globally it has around 90 million users across 17 countries. Affirm, which operates in the US, Canada and Australia, reported its active user base almost doubled year-on-year in 2021 to 8.7 million users; the company has since partnered with Amazon.

Another key player in the market, Zilch, was Europe’s fastest-ever company to go from Series A funding to unicorn status – it took just 14 months. Zilch’s digital card, which is available in the UK, reached over 1.7 million customers in less than 15 months. The company also partnered with Mastercard to expand its services into Europe.

Despite customers flocking to the services, some are racking up debt. A recent report from Credit Karma found UK consumers racked up £3.3bn in BNPL debts over Christmas 2021. It also claimed that 42% of the people to make a BNPL service for Christmas in 2020 have not fully repaid their debts, with 11% admitting to have missed repayments.

Due to situations like this, there have been increasing calls for the industry to be better regulated. In the UK for example, the Treasury launched an official consultation on the policy options to regulate the sector. Consumer group Which? also published condemnatory research that indicated many BNPL users are opting into the schemes without realising they are a form of credit, unknowingly putting themselves at serious risk.

Are consumers being misled?

The fact many consumers are not aware that BNPL is a form of credit poses the question of whether they are opting into a product under a false pretence of what it actually is.

Alex Marsh, head of UK at Klarna, rejected this notion. He pointed to a recent YouGov survey which indicated nine out of ten BNPL consumers are aware that it is a credit product that needs to be repaid in full.

“For our part” he said, “we make it absolutely clear in the checkout and our Ts and Cs that we’re offering a credit product with both the required payment dates and the consequences of missed payments. This transparency, combined with our strict eligibility assessments means we get extremely low complaint rates and very high repayment rates: our default rate is 30-40% lower than for a typical credit card.”

Philip Belamant, co-founder and CEO of Zilch, also claimed the company is clear about its product. Moreover, he said that because Zilch is not a point-of-sale finance provider unlike other BNPL providers, customers are onboarded directly before a transaction, not at the checkout. This means, Zilch has a “full view of affordability” he said.

Belamant said Zilch “clearly communicates” to its users that its product is a form of credit. “Our incentive lies in providing the customer a sustainable credit product, rather than encouraging them to make impulse purchases they may not be able to afford over time,” he added.

To ensure transparency, Belamant said customers are able to see their payment schedule in the Zilch app or website and are sent reminder emails ahead of any upcoming payments.

Matt Gross, director of financial communications at Affirm, also emphasised the notion of transparency. “That’s one of the central principles of what our company was founded upon, no fine print,” Gross said. “We believe that consumers should have completely transparent information about what they’ll pay and when they’ll pay it.”

Where does the responsibility lie?

Pressures have continued to mount for BNPL providers to be more tightly regulated, but this has been ongoing for some time. This perhaps suggests that the responsibility to protect customers lies with the regulator, but do BNPL providers themselves not hold any responsibility?

Klarna’s Marsh believes BNPL providers do have a responsibility to ensure their consumers know what they are agreeing to, including the consequences of a non-payment. “For our part, our BNPL products are both interest free and free of any fees, and we make it absolutely clear every time you check out with Klarna and in our Ts and Cs that we’re offering a credit product with consequences for non-payment,” he said.

According to Gross, Affirm also believes providers have a level of responsibility to their consumers. He stated Affirm has an “unwavering commitment to simplicity and transparency” and providing consumers information at checkout so they can make informed decisions is key.

Marsh added that Klarna welcomes the UK Treasury recommendations for stronger protections for BNPL consumers, “which are badly needed as the old banks enter this space, bringing with them dirty tricks and double-digit interest rates. It’s important the regulation protects consumers, not banks, and enables continued innovation, competition and alternatives to high-cost credit, within the appropriate guardrails.”

While the traditional banks have yet to make a big play in the BNPL market, challenger banks are making their move. UK neo-bank giants Monzo and Revolut have both revealed plans to release these services, while Curve’s version is already live.

Financial education

If BNPL providers are largely being clear and upfront about their products and timelines of repayments, why are some consumers failing to understand the terms they’ve agreed to? Should BNPL providers also provide greater financial education surrounding their products?

Klarna’s Marsh said all credit providers have an obligation to be fully transparent with their customers about the terms of their offers and to educate them on what they actually mean, and this is not confined to the BNPL sector.

“For too long credit providers have hidden behind ticking the box of outdated prescriptive regulation to provide the required information to consumers – without thinking about the people actually using these products: in a recent survey we found that over 60% credit card users did not know the interest they were being charged and not a single respondent could correctly calculate the total cost of a purchase made on a credit card once interest is taken into account.

“Additionally, two-thirds said it was not clear when a credit card needed to be repaid in order to avoid charges and half of all respondents said it wasn’t clear that spending on a credit card could incur additional costs.” Marsh suggested these findings indicate that regulation alone may not help consumers understand the most basic terms of the credit agreement they enter into.

Klarna recently launched its own credit cards, empowering consumers in Sweden and Germany to access its BNPL services to offline transactions. It is now in the process of launching the service in the UK and has eyes on the US market. It claims its credit cards will have clearer payment schedules, no interest and no late fees. Speaking to the Guardian, it also claimed customers will have personalised spending caps.

Leon Wilson, CEO and founder of PollenPay, a newcomer to the BNPL space gearing up to launch, said BNPL providers should be offering financial education to their customers if they aren’t already doing so and suggested it may need to be made more obviously available. “There is already support out there, but it may not be prominent enough to reach consumers,” he said.

Credit checks and vulnerable consumers

BNPL’s critics argue that the credit checks performed by many providers aren’t a thorough enough assessment of a consumer’s ability to make the repayments, thus putting financially vulnerable consumers at risk.

Belamant said although Zilch welcomes calls for stronger safeguards to be put in place to protect vulnerable customers, the problem lies with a lack of reciprocal reporting. He said, “’Soft’ credit checks alone are not enough to protect vulnerable customers who run the risk of falling into debt as there is no reciprocal reporting.”

He suggested that BNPL providers make use of leading-edge technologies such as open banking to determine other debt commitments a consumer may have. “This does not require others to perform reciprocal reporting but provides transparency all being sought after all the same. Zilch is doing this today. Customers should also not be allowed to make use of credit cards to pay back BNPL providers as this, by its very nature, is loan stacking.”

Zilch’s Belamant added, “As part of any failed payment notification, we also ask our customers to inform us if they are suffering any form of financial distress. Customers’ accounts are put on hold for those who fall behind on payments to ensure that they do not fall into any further arrears, and we provide links to external resources and contacts for independent debt advice charities.”

Gross said Affirm runs soft credit checks to inform its underwriting process, “Our models are based off billions of data points and our decade of operations to predict a consumers repayment ability before we extend access and make a credit decision. And sometimes that means we have to say no to a consumer, which we obviously don’t want to. We’re very serious risk managers and take our underwriting extremely seriously. We don’t want the consumer to get in over their head. It’s not good for the consumer, not good for the merchant and not good for Affirm.”

Klarna’s Marsh said the company performs “robust eligibility assessments including a soft credit check each and every time someone wants to make a purchase to ensure we only lend to people who can pay us back.

“Our business loses out if they don’t, unlike credit card companies which profit from missed and late payments by charging double digit interest charges and fees. Our low loss rates are <1% which are 30-40% below industry standards and traditional credit cards.”

PollenPay’s Wilson added that BNPL providers tend to have significantly lower limits in which a consumer can spend when compared to traditional payment methods, such as credit cards, and some providers stop consumers from purchasing new items if they have a history of late repayments. “PollenPay temporarily restricts its customers from spending and making any further purchases if they have any overdue payments.”

The lesser of two evils

Some particularly concerning research has shown that people are more likely to use BNPL services at challenging or stressful times in their lives. On the face of it, this is a concerning insight that may suggest it is those who are most financially vulnerable who are using BNPL services. BNPL providers themselves, however, seem to suggest that when push comes to shove, a BNPL service is a less risky alternative to a payday loan.

Affirm’s Gross insisted that the ability for a consumer to pay at their own pace in a challenging time is an “essential service.” Take for instance, an individual who needs to replace their tires unexpectedly in order to be able to drive to work and cannot pay the upfront cost, “their options may be a payday loan or to pay over time with a provider like Affirm… If we underwrite poorly, it’s on us and we lose,” Gross said.

Indeed, Klarna’s Marsh agreed that BNPL offers “an alternative to predatory traditional banking and credit systems.” Additionally, Marsh pointed to a Which? Survey which reported that BNPL users are more likely to have a higher salary and be in full time employment than the general population, rejecting the notion that the services exploit those who are more likely to be at risk of debt.

PollenPay’s Wilson said that ultimately, the use of BNPL services is a personal choice made by an individual. It is simply an alternative payment method, as opposed to a traditional form of credit. “Customers may need to buy a certain product, or service immediately due to an emergency, but may not have the finance available at that time. In these circumstances, BNPL providers such as PollenPay, give consumers a safety net as an option.”

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