I spent many a Saturday of my teens and twenties on Oxford Street, rising early and emerging from the tube with gleeful anticipation for spending the day exploring so many shops which now (unhappily) are facing very difficult times. The very act of going to the high street; finding a bargain, stopping for a coffee, chatting with friends while raking through the rails – this was always half of the fun for me.
Now, our national relationship with buying ‘stuff’ has changed forever, with the pandemic prompting a new era in how we all shop and spend. From the depths of Lockdown 3.0, shopping is either hyper-local or almost exclusively online. And the latter poses a very different experience to the high street, not least in the way we pay.
At almost every online check-out we are faced with a series of short but tantalisingly tempting messages, inviting us to split the payments into three (seemingly tiny) installments. Buy-now pay-later (BNPL) has been introduced by dozens of retailers in recent years, and if we’re not using their services directly, then the chances are that our debit or credit card payments may be processed via BNPL technologies.
The release this week of Sir Christopher Woolard’s review into unsecured credit prompts a significant and timely change in how BNPL credit will be regulated. As the Financial Times succinctly reports, the review found that five million people have used BNPL since the pandemic began – but many failed to realise they were entering into a credit agreement by using the service, and 10% of customers at one bank are now in arrears as a result. As Citizens Advice Cymru warns of a ‘debt time bomb’ ticking across Wales and the rest of the UK, there is more need than ever for clarity when it comes to personal finances – to give people the best possible opportunity to manage their money effectively. This begins with being clear on what credit looks like, and how (if used incorrectly) it can cause damage.
We’ve been here before of course, albeit in slightly different circumstances, with the flight and fall of payday lenders. While there’s no doubt that bad actors operated across this achingly complex landscape, there were just as many lenders working responsibly to fulfill a very real consumer need: providing much-needed credit to those considered too risky by mainstream banks and building societies.
It’s important to reiterate as well that there should be no shame nor judgment in how people choose to spend credit. It’s not for anyone (especially not the media) to criticise how people want to live. And as human beings living in a free society, we must be free to do as we wish, within reason – that includes buying what we want but also taking responsibility for our own financial positions.
But hand-in-hand with this is the regulation which protects us. The FCA’s new focus on BNPL is vital in continuing to mitigate financial risk for consumers, especially shoppers in their teens and twenties.
Now more than ever there is a huge focus on the many small actions which can impact an individual’s credit score for years to come – at the more dramatic end of the spectrum, buying a pair of shoes now could cost you a mortgage later. New regulations will pose new challenges for BNPL providers who have invested time and resources to achieve the smoothest user experience, but who must now operate hard credit checks and more affordability testing wherever a customer opts to defer payments.
The action taken by the regulator will help a great deal in ensuring consumers have the right degree of protection, but the brands must also play their part. Providers like Klarna, ClearPay, and others are not shy in their communications, with bold campaigns and clear words, but now they will need to up the ante. They must rise to the challenge posed by this new regulation and work hard to educate their audiences so that everyone (shopaholic or not) opting to pay in ‘three easy installments’ truly understands what they are signing up for and what it could mean for their long-term financial future.