Buy now, dismay later?

Consumer credit is back in the headlines with a vengeance this week. Barely a day goes by without an article on a customer being inadvertently dragged into unsustainable debt by a new credit solution which they do not fully understand. According to the BBC, buy-now, pay-later services were used by five million people in the UK for total sales of £2.7bn in the last year. The popularity of such relatively new payment services has been booming in recent months driven partly by necessity, partly by opportunism, as online shopping has become one of the few pleasures left to enjoy in lockdown.

However, this phenomenon has attracted the attention of the regulator which has been worrying about the consequences of the conflation of reduced incomes and spiraling consumer debt. The focus of this concern is on ensuring that people are being treated fairly and only offered agreements they can afford. In other words, it is all about offering consumers the same level of protection they would expect with other types of loans. Currently, any debt contracted through these services would not be seen by credit reference agencies and other lenders, implying that no affordability checks are being carried out by the service providers. This is what the FCA would like to remedy urgently, to prevent more vulnerable consumers falling into unsustainable debts.

Risky business

The typical user profile of such services is particularly alarming to the Economy Secretary to the Treasury and the FCA alike. According to the Woolard Review, 75% of users are female and young. A quarter of them are aged 18 to 24 and 90% of all purchases involve fashion and footwear. Their popularity with younger shoppers arose initially with the convenience they offered of being able to try items before buying or returning them. Although there are clear benefits for both retailers and consumers in the flexibility and innovation provided by such payment services, their use by a young demographic with potentially limited income and financial sophistication is clearly not without risk. This fact is readily conceded by leading providers like Klarna, with many of them accepting that now is time for regulation.

These latest headlines bring us back  to the broader questions of responsibility and the need to increase financial literacy among younger demographics. This is a group that has grown up largely in a world of dematerialized, fast-moving money where clicking has become synonymous with buying and can be done 24/7 from the comfort of one’s own bedroom. These were the first generation of children who were able to rack up enormous mobile phone bills or gaming platforms debts unbeknown to their parents, until it was too late. So while regulation is important, laying the right educational foundations is better and has become incredibly urgent as new, ever more innovative payment solutions continue to come to market.