Buy Now, Pay Later schemes causing debt concerns.

The use of buy now, pay later schemes is increasing across retailers.

They are transforming the way many people shop, but experts believe there are hidden pitfalls surrounding their use.  They could lead to more people falling into debt.

New buy now, pay later firms transforming the way we shop.

These new fintech companies use technology to make shopping quicker and easier.  And retailers are signing up to firms such as Klarna, Clearpay, Laybuy and Laterpay.

These businesses work with retailers to offer shoppers the chance to delay or spread payment for their shopping without resorting to credit cards or dipping into their overdrafts.

That may be by delaying payment to payday or staggering repayments over a few weeks, with payments taken automatically or made via an app. 

Klarna, a Swedish fintech firm is one of the largest.  It now has more than 3 million active users in the UK and has partnered with more than 170,000 merchants across the world. These include major retailers and brands such as Asos, Peloton, Abercrombie & Fitch, Superdry, Samsung, Topshop and Agent Provocateur.

Concern is growing that frictionless debt could be storing up problems for shoppers.

Providers differ in the services offered but the cost of the credit is commonly covered by the retailer, to help them secure a sale.  The use of the technology enables shoppers to take on debt without filling out stacks of forms or paying a very high level of interest.

Shoppers find this can make it cheaper than other pricey credit options.

Retailers know that easier the shopping experience the more likely customers are to purchase goods from them.  Hence, to be competitive, retailers do not want to fall behind in offering these services.

Buy now, pay later is tempting people to buy more.

Consumers have long had, of course, the ability to buy now and pay later. Credit cards have been around for a very long time. There are also other types of credit such as store cards and overdrafts.

But buy now, pay later services make that credit even more frictionless. With customers now to delay payment with the same ease as making a standard transaction.

Are we storing up problems for the future?

Some experts believe that using these types of services could store up more problems than those more established ways of paying later.

Philip Haglund is the founder of Gimi, a pocket money app that focuses on building financial literacy. Voicing his concerns, he said:

“With big retailers offering customers this service, consumers [may] not realise that it is a financial commitment. People tend to go with the payment alternative that requires the least effort.” 

“It can be tempting for consumers to buy more than they can afford at that moment in time and their spending increases when given a choice to pay later, therefore the likelihood of occurring a higher interest rate and debt is undoubtedly greater.”

He believes these payment systems can serve a purpose such as helping spread the cost of Christmas. But there are other people who are also sounding the alarm bells.

27% of survey respondents experienced financial difficulties.

A survey carried out by Hastee, which enables workers to access part of their income as they earn it rather than waiting for payday, showed that half of respondents said that buy now, pay later schemes encouraged them to spend money they didn’t have.

27% said they had experienced financial difficulties after using these kinds of pay-later schemes. Although they are an alternative to credit cards and other credit, there are worries that repayments risk pushing people into relying on other forms of debt.

James Herbert, CEO of Hastee, says:

 “While they seem like a good short-term solution, they can cause consumers issues in the longer term.” 

 “Missed payments can impact credit scores, cause longer term debt problems and could create an unhealthy reliance on credit cards and overdrafts as users struggle with repayments.”

Fintech firms argue they offer flexibility and convenience.

The fintech firms providing this kind of credit argue that they are giving consumers what they want and need rather than tempting them into debt.

A spokesperson for Klarna says their service is often used for flexibility and convenience rather than financial reasons, such as allowing them to order items to try on and potentially return without spending a large amount upfront.

“Our target market is any online shopper who values convenience, flexibility and financial control.   For example, we are observing a notable trend among new mums who do not want to bring young children into stores and changing rooms. Who prefer the convenience and privacy of trying the goods in their own home.”

“Consumers don’t pay to use our pay later in 30 days or instalments products, it’s free. No interest, no late fees ever.”  

“It wouldn’t be responsible for us to lend to everyone every time, so we do eligibility and affordability assessments, including a soft credit check (which does not impact a customer’s credit score), to ensure customers who choose to pay later can use our product in a safe and sustainable way.”

Shoppers urged to remember that this is a form of debt.

But James Herbert urges shoppers to remember that this is a form of debt and to use it only if they have confidence they can repay the cost in time.

“If you can’t afford the repayments, consider whether you really need the item or work out another way of paying for it that won’t cause you long-term financial difficulty,” he recommends. 

“There are plenty of digital money management tools that work together to help people live comfortably and within their means, such as challenger banks, earnings on demand solutions and budgeting apps.”

Frictionless credit makes it easier to shop and potentially cheaper to shop on credit. But this is a new and fast developing kind of debt and its full impact on UK shoppers is probably yet to be seen.

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