Last week, we wrote about why Buy Now Pay Later (BNPL) should be regulated as a credit product, because it is a credit product. Like a credit card, BNPL is used to spread payments on an initially interest-free basis, but if the outstanding balance cannot be cleared in time, the subsequent charges can be expensive. Here, we write about why BNPL must be regulated as a credit product because of the harm it can cause people, and provide further detail of the link between BNPL and credit card borrowing.

Existing insight from debt advice charities and other organisations has revealed what harms are associated with BNPL, and who they tend to affect. StepChange for instance has previously reported that half of those with a BNPL loan found it difficult to keep up with bills and credit repayments. 17% of borrowers fell in to “severe financial difficulty”. 40% of BNPL borrowers had fallen behind on housing payments or utility bills to keep up with repayments and 39% reported that credit had a negative impact on their health, relationships or work.

A survey from Barclays, quoted in a recent article, found that “while BNPL services are more accessible than credit cards, two in five users are unclear on the terms and conditions, and do not fully understand the consequences of missed repayments.”

But perhaps for many BNPL users there is not an either/or for more traditional forms of consumer credit. Many users have been charging their BNPL to a credit card. Last year, Citizens Advice found that 26% of BNPL consumers paid for BNPL using their credit card and 42% used another type of borrowing such as an overdraft or payday loan.

The link to credit card debt

A more recent academic study , published in March this year, found that charging BNPL to credit cards is a growing problem. One that is causing younger people and those in areas of high deprivation considerable financial pain. The study’s authors obtained access to anonymised UK credit card transactions data. This is the first time such large-scale data has been used in a way to estimate the ways in which BNPL products are being used by people. The data includes approximately one million credit cards held by UK consumers between December 2018 & September 2022.

The main findings of the study reveal that 19.5% of UK credit cards active (i.e. with any transaction present) in December 2021 have a transaction by a BNPL firm charged to their credit card during that year. They find that while the median value of each BNPL transaction is reasonably low, at £19.65 with 96% valued at £100 or less, the median value of BNPL transactions per card in that year is £157 and 17.6% have transactions of £500 or more. This means many people have multiple BNPL transactions, some of them very expensive as far as short-term credit values are concerned.

This is especially significant since, as a Credit Karma study found in 2022, 41% of BNPL users had missed a payment and incurred charges, up from 11% in 2021.

Mapped onto all credit card spending, the authors work out that BNPL spending averaged 1.2% and 1.6% during 2021 and December 2021, representing significant growth. This rises neatly in line with official estimates sizing the value of all UK BNPL lending during 2020 at £2.7bn. As the market for BNPL grows, so too does charging those transactions to credit cards.

The authors also find that BNPL usage in the most deprived areas of the UK have higher rates of charging BNPL to credit cards. While this doesn’t mean, in itself, that there are higher rates of harm associated with usage, they do recognise that “more generally … credit cards in the most deprived areas of England are those least likely to repay in full, be eligible for 0% credit card deals, and instead have higher interest rates.” While BNPL is interest-free, the way in which many people end up paying for it can compound charges and interest, making it expensive.

Regulating BNPL should be strengthened, not shelved

BNPL providers have argued that an “uneven playing field is being opened up” in the UK market. This is because discussions concerning BNPL regulation did not include merchants but only third-party providers of finance. PayPal, Apple, and Google - all of whom have announced their intention to move into the BNPL market – could be “given an unfair advantage”.

We at CfRC advocate for effective regulation of the BNPL product, whichever firm is offering it. There is clear harm in this market, and the potential for this is growing as the market expands. HM Treasury should not shelve plans to regulate BNPL but strengthen them. We see no reason why BNPL providers should not have to comply with the same regulatory requirements as credit cards.

Aug 23, 2023

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