The Latest Credit Craze: Buy Now Pay Later

Buy Now Pay Later (BNPL) refers to a class of new, credit-based payment methods. With brands like Klarna and ClearPay leading the charge here in the UK, now e-wallet giant, PayPal, and other payment firms are rolling out their own BNPL offerings. And it’s no wonder why, with the market for BNPL growing 50% year on year- it’s becoming a really popular payment option amongst consumers.

According to a HSBC survey, credit cards remain the most popular option for finance in the UK. However, BNPL ranks second, already overtaking the likes of overdrafts and personal loans. This payment method is particularly popular with women and those in the 25-34 age bracket who typically discover this type of payment method when it’s presented to them as a payment option in a checkout for the first time.

Users of BNPL reportedly value it over other forms of finance largely because of its simplicity, plus the ability to spread the cost of a purchase in an affordable way. The barrier to entry and management of BNPL appears lower (versus say applying for and paying off a credit card).

However, critics say BNPL is making it too easy for people to get into debt and the UK government has moved to take action. Indeed, regulation around this new form of credit has tightened this year: with affordability rules coming into effect, for example. Further, the FCA has warned firms that BNPL ads must comply with financial promotion rules.

Until recently, BNPL didn’t impact on users’ credit history and score. However, since 1st June 2022, the likes of Klarna and others must report on the use of their product to credit reference agencies. All of this means that, moving forward, if a customer misses or is late with a repayment then it will reflect negatively on their credit score. And that’s problematic given the main demographic of BNPL customers don’t typically have a firm understanding of the implications of poor credit scores.

Whilst BNPL payment options have become ubiquitous across e-commerce websites (particularly in the fashion sector), brands are now starting to introduce these payment methods in store too. Customers at the till can scan a QR code displayed on the payment terminal to load apps like Klarna to complete payment. That’s great for merchants who typically report an uptick in average order values and customer loyalty upon enabling BNPL for a sales channel.

My concluding thoughts

My personal take is that no form of credit-based payment offering is going to be portrayed in the brightest of lights by the press. Whilst it’s absolutely correct to scrutinise this new finance product, and reflect on whether it might pose a threat to consumers, I believe the combination of increased convenience and tighter regulation represents an overall positive shift in the overall consumer credit market.