“If you can’t buy it twice then you can’t afford it” – How BNPL schemes are ruining credit scores

If you can’t buy it twice then you can’t afford it. – Jay Z

Wise words from one of the most successful rappers of all time, words that should be headed by a number of the UK’s growing demographic of people falling into the trap of buy now pay later (BNPL) schemes which are growing in strength.

BNPL schemes have exploded in popularity over the last 18 months and while they offer consumers a more affordable way of purchasing the larger ticket items they might not be able to afford up front, they are a growing concern for the financial health of our country.

Some of finance’s biggest names are calling for a clampdown on an industry which is taking credit borrowing to the next level, one instalment at a time.

The use of BNPL schemes boomed last year, reaching £2.7 billion in transactions in the UK and analysts believe that anywhere between five million and in excess of 10 million UK consumers used one in 2020.

Why are they calling for the clampdown? Paying for items in instalments sounds like a sensible financial decision on the surface, however there are growing concerns that it is having a detrimental impact on the finances of young people in the UK.

“Changes are urgently needed: to bring BNPL into regulation to protect consumers; to ensure that there is secure provision of debt advice to help all those who may need it; and to maintain a sustained regulatory response to the pandemic,” Financial Conduct Authority former interim chief executive Christopher Woolard said.

READ MORE: Klarna under investigation amid accusations it breached bank secrecy laws

The unregulated BNPL schemes give shoppers a financially viable alternative to more expensive credit, however, it comes with a much higher risk of hurting individual financial health.

BNPL firms such as Klarna perform soft credit checks, which it says does not affect individual borrowing power. However, more and more people are failing to pay the credit on time, having lasting impacts on their financials in the eyes of lenders.

Missed payment fee revenues for some of the US’ biggest BNPL lenders including Afterpay stood at over $43 million last year, while the number of transactions leapt 90 per cent.

A study conducted on behalf of Credit Karma by Qualtrics found that of 1,044 Americans surveyed in August, 44 per cent have used a BNPL service. Of those, 34 per cent have fallen behind on one or more payments, with 72 per cent of those who fell behind believing their credit score declined as a result.

Separate research conducted by consumer group Which? suggests that missing a credit repayment or bill or experiencing a major life event, such as getting married, having a baby, moving home or being made redundant, increases the odds of using BNPL by around a third (38 per cent and 35 per cent, respectively).

So what does that tell us about the nature of BNPL payment decisions? They can be reckless.

“Buy now pay later services raise a number of concerns for us,” finance charity StepChange head of media Sue Anderson told Charged.

“Firstly, they don’t give individuals enough time or protection to stop, pause and understand the consequences of their purchase.”

“Secondly, affordability checks are only used by some BNPL lenders, and protections against taking out multiple BNPL loans are lacking.”

READ MORE: Monzo muscles into BNPL scene by offering customers up to £3000 credit

More than one in 10 UK consumers of one of the country’s major banks that were using BNPL are already in debt, while BNPL providers are able to send through an individual’s credit limits, owed balances and payment history.

What makes BNPL schemes potentially dangerous is the ease of which a consumer is able to apply. A soft credit can be easily bypassed by people who are at greater financial risk.

Currently, the space is largely unregulated in the UK, meaning that firms do not have to abide by any consumer credit conduct laws or FCA legislation.

However this is set to change after the UK government announced in February that the FCA would become the independent regulator for the sector in order to “protect consumers.”

The changes will mean that lenders will be required to carry out affordability checks on customers and ensure the vulnerable are treated fairly.

This could prove to be a huge blow to BNPL firms as the convenience of offering “free” credit to everyone is what has given them their impressive success over the last 18 months.

Economic secretary to the treasury John Glen added: “Buy now pay later can be a helpful way to manage your finances but it’s important that consumers are protected as these agreements become more popular.

READ MORE: PayPal launches “super app” offering everything from savings accounts to crypto trading

“By stepping in and regulating, we’re making sure people are treated fairly and only offered agreements they can afford, the same protections you’d expect with other loans.”

The government is keen to make sure that BNPL firms treat their customers “fairly” and by this it means to make sure the space is as transparent as possible.

This is because at the moment, there are a number of ways that BNPL firms go under the radar in how they operate, often disguising the option of using their service so customers are unaware of what they are signing up for.

Anderson added: “Sometimes this even means people end up using BNPL at the online checkout without actually realising they had signed up.”

A survey conducted by Which? in October last year found that 26 per cent of BNPL users hadn’t planned on using BNPL until it popped up at checkout.

There have also been a number of reports of BNPL schemes being “pre-ticked” when a user goes to checkout.

Klarna and the University of Reading conducted a report for retailers back in 2017, explaining how to persuade shoppers to make “emotional” purchases instead of “logical” ones.

The research concluded that “the less the customer is required to think about inputting data, the more likely they are to make a purchase without too much consideration.”

A large proportion of people using BNPL schemes are not aware that they are doing it and not only this, but a large degree are not aware that missing a payment on an item can lead to the BNPL firm passing the debt on to a debt collection agency.

If this happens, it can remain on your credit report for at least six years.

READ MORE: Retailers demand government action on Visa and Mastercard’s skyrocketing card fees

While consumers can find this information out, it involves reading through a lender’s terms and conditions, which a large number of people are unlikely to do when checking out.

Klarna’s boss Sebastian Siemiatkowski told the BBC: “We want to have regulation to avoid penalising people unnecessarily in that we want to have a full understanding of their financial position.

“We’ve got to be very very careful not to put regulation in place that actually will benefit the incumbents that are making billions in interest from UK consumers.”

In a later PR campaign aimed at dispelling what it called “ridiculous” myths surrounding its service, Klarna said: “To date, a customer’s credit score has not been impacted by using Klarna’s ‘pay later’ products even if they have failed to pay on time.”

Anderson added: “Many of these issues can be addressed effectively by bringing buy now pay later products into the regulatory sphere of the FCA, which is why we hope the Treasury will soon be forthcoming with the formal consultation on how best to do this.”

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