OWN UP, BUY NOW PAY LATER. YOU’VE BEEN RUMBLED.

You may have heard. In the UK the FCA are moving in on the ‘kick the can down the road’ world of Buy Now Pay Later easy credit (eg Klarna, Clearpay and the rest).

I’ve been getting under the skin of consumers in this area for a few months, but if you don’t know BNPL, these are products that account for hundreds of millions of pounds of unregulated lending across Europe and the UK. In many cases the debt is owed by younger people who don’t realise they have entered a binding legal agreement, and plenty of whom are running into trouble.

NOT CREDIT? HMM.

The BNPLs argue they don’t do credit, they do payments. But if it quacks like a duck and looks like a duck, then I think we can deduce, Watson, then it’s having fun in puddles.

The BNPL credit providers (let’s call them credit providers and have done with it) have been eye-wateringly successful in their exploitation of a loophole in the Consumer Credit Act that lets them offer unregulated credit to millions in the UK. On the back of this Klarna have become one of the first Unicorns in Europe after only a couple of years in business.

ROBIN HOODS OR PARIAHS ?

It would be nice to be able to paint the BNPL-regulator-resistance as Robin Hoods, distributing funds to the unfunded and defying a dinosaur industry — and in a way this is true (see later) but in so many important ways it isn’t. There are a lot of regulated credit providers in the UK that play nicely, and the problem with unregulated lenders who don’t is there is not much (apart from willpower) protecting consumers from the many rather well organised operations who are keen to encourage you to buy something, well actually anything, whether you can afford to or not.

‘Unregulated’ btw means nobody checks affordability, repayments or reports defaulting so the industry remains blind to this and can’t identify people getting into trouble or warn others.

THE SPOONFUL OF HONEY IN A PIT OF TAR (an apposite Russian saying)

Undoubtedly the BNPLs have been successful because they have met customer needs that traditional providers have ignored. In doing so they’ve brought change to an industry that needed to look hard at itself and how it does what it does. For instance, in explaining what they are asking customers to agree to, many traditional providers just provide *impenetrable to the consumer* Ts&Cs, rather than trying to reach for the FCA’s intention of actual understanding.

From a consumer experience perspective, the BNPLs provide simple, uncluttered and seamless credit journeys with headline grabbing zero percent interest rates (the retailer pays the piper). But they are so slick many consumers don’t realise they are entering a legal agreement and in the world of financial services that’s not a great thing. In fact, it’s flashing light and klaxon time.

Borrowing from Klarna has been described to me as more like borrowing from a friend than a bank and that’s a double-edged sword. The person who told me this also said they thought Klarna would behave like a friend if they got into difficulty. But I’m pretty sure it wouldn’t feel quite like that.

Retailers also have had needs that are better met by BNPL and other than an uptick in sales, the BNPLs have made it really easy for retailers to integrate credit into their check out processes.

What Now ?

The BNPLs have so much market share they are probably too big to fail. In essence they have made the retailer pay them to move the risk of credit to the consumer and if this fails, to society. But they have been rumbled and hopefully before this becomes a societal, not just a business problem.

We are about to experience some tough economic times and it’s important the BNPLs are prevented from further invisible, unaccountable lending. I’m optimistic this will happen and that in the longer term BNPL disruption will mean the credit industry changes for the better as retailers offer responsible credit to consumers who are informed about what they are getting into. I also believe it’s the responsibility of lenders to give borrowers the flexibility to better controls and manage their borrowing and navigate changes in their fortunes — because a change in fortune is coming to many.