Article by Andrew Brown - 2nd March 2020

Everything You Need To Know About Buy Now Pay Later

One of the latest trends in retail is the growing popularity of buy now, pay later schemes. The premise of buy now, pay later is exactly as it sounds, allowing shoppers to delay and stagger payment for a product that they can take home immediately.

It’s a tempting deal. Have what you want now, and spread the cost over time to make it more affordable. This is how all credit products work though, right? But if you’ve encountered or used a buy now, pay later scheme, it might not have been immediately obvious that it is a credit product.

So how does buy now, pay later really work, are they a smart way to manage your payments or are the schemes too good to be true?

What retailers are associated with buy now, pay later?

Amongst the leaders charging into buy now, pay later schemes are Swedish fintech company Klarna, alongside Clearpay, Payl8r and Laybuy.

Buy now, pay later schemes are commonly used alongside fashion retailers. ASOS, Boohoo, Topshop, M&S and many more all have either their own payment platform or have a partnership with a specialised provider.

Buy now, pay later schemes have exploded in the fashion industry, allowing people to get that new pair of jeans, dress or other must-have item as soon as they see it, rather than at a time dictated by their finances – crucial if you want to wear something whilst it’s still in vogue.

It’s possible to make the case that fashion brands are targeting young consumers specifically with tempting buy now, pay later schemes. The marketing would certainly suggest so, with Klarna describing shopping through its platform as effortless, safe and fun.

Over 50% of people aged 22-29 have no savings according to the Office for National Statistics, while a survey from Compare the Market suggests over 10 million adults in the UK have used a buy now, pay later scheme in the last 12 months.

If you’re young and managing your finances on a month-to-month basis, a buy now pay later scheme could be extremely appealing – but perhaps not the best option.

What customers need to know about buy now, pay later schemes

It’s important shoppers look beyond the new trainers and recognise the potential financial consequences of buy now, pay later schemes.

The bottom line is, financial arrangements like these are a form of short-term loan. So how are buy now, pay later schemes different from other short-term loans?

Looking at Klarna, one of the market leaders, they offer three main options to spread the cost of purchases. One lets you spread the cost of a purchase over 3 equal monthly instalments – interest free. The second lets you simply delay payment until 30 days after purchase, sending you reminders before payment is due. Financing, the third option is more complex and lets you spread the cost of a purchase over a 6 to 36 month period – again interest free.

These all seem great if the models and systems they have in place function as advertised and people can make all their payments on time. However, there are plenty of reported cases across buy now, pay later schemes where people have trouble making their repayments, for various reasons, which develops complications.

In Klarna’s case, the terms and conditions confirm that a credit check will be undertaken at differing levels depending on the product. ‘Pay later’ involves a soft check (that won’t be visible to other lenders or impact your Credit Rating) whilst ‘Financing’ involves a full credit check.

With its ‘Pay later’ and ‘Pay in 3 instalments’ products, Klarna says that it does not share information with Credit Reference Agencies and that customers’ Credit Scores are not harmed, even if they fail to make payments on time. Klarna says that only its ‘Financing’ product could result in late payments being reported to Credit Reference Agencies (CRAs).

As the schemes are generally interest free, they’re less risky than other forms of credit. This is a big positive, but with research suggesting that a large proportion of consumers are unaware that any of the buy now, pay later products could harm their Credit Rating, choosing to enter into an agreement shouldn’t really be an impulse decision.

How do buy now, pay later schemes affect a credit report?

The most striking thing about Klarna’s service is that in 2 of its 3 payment options, as detailed above, even if you miss your payments, they say your Credit Score will never be affected. This means they will not be reporting payments to Credit Reference Agencies at the time of writing. This is quite unusual for a what is essentially a short-term loan.

In the case of the Financing product – where the cost of purchases can be spread over 6-36 months, any missed payments that are reported to CRAs could have the same implications for your Credit Rating as if you missed payments on a more traditional credit card or loan.

How does buy now pay later compare to other credit schemes?

This isn’t the first time retailers have come up with the own credit schemes separate to traditional credit lenders. Store cards have been around for years and have fluctuated in popularity. These are effectively credit cards that can only be used in one store, group or chain like Arcadia. These typically offer an in-store perk as an incentive to sign-up, but then charge high interest rates if not paid off in full.

There’s a tendency for store credit cards to get a bad-press, as they tend to entice impulse buyers with the good initial deal, without realising the full financial implications of the card. Then the high APRs can sting these customers who don’t pay it off within the first month.

There are also retailers that differentiate themselves by offering credit as the main way to pay like Littlewoods. One of their main benefits allowing shoppers to spread the cost of every purchase, interest free.

Therefore, the reality of retailers using credit facilities as a tool to convince shoppers to push the button purchases is not new for 2020 – it’s been a constant of retail for a good while. But buy now, pay later seems to be becoming a norm in the ever-growing jungle of online shopping.

What are the concerns about buy now pay later?

By specifically targeting fashion retailers, and getting young adults in the habit of using short-term credit facilities without the fear of repercussion, it doesn’t help them take financial responsibility.

Plus, there seems little regard for the nature in which buy now pay later schemes are being advertised. There seems to be little to no warning about the responsibility and caution that needs to be considered when using a short-term credit facility – or even notification that buy now pay later is a credit facility.

If many young consumers don’t know that they’re using a credit facility, how can they be expected to manage it?

Klarna announces first ever annual loss

As of February 2020, market leader Klarna announced their first ever annual loss of over £72 million. Launched in 2005, Klarna has made a profit every year, until now. The loss comes despite 2019 arguably being its most successful year to date through astronomical growth. Klarna has increased users six-fold in the US, doubled users here in the UK and the amount of goods sold through Klarna increased by 32%, valued at more than $32 billion from over 200,000 merchants globally.

Klarna state that the loss is due to their significant expansion efforts worldwide, not just in the US and UK, but across Europe too. This also includes the higher default rates that comes from aggressive expansion and targeting customers (primarily millennials) who are brand new to the buy now pay later concept.

It could be argued whether this rate of growth is sustainable, especially given the types of consumer Klarna is targeting at its core. A higher default rate may be a sign that too many customers are stuck in a loop of being charged to service debt they could not afford in the first place.

Klarna says it is trying to reduce the percentage of revenue it receives from charges relating to missed payments by ensuring that more customers are encouraged to pay on time each month. This will be key to the long-term profitability of buy now pay later services such as Klarna.

What are the long-term effects?

Taking a step back, it would be wrong to assume that all consumers who use buy now pay later schemes will do so blindly and irresponsibly. The main concern is that companies are using the schemes purely to boost sales, without best interests of customers at heart – without fully explaining what they’ve signed up for.

In the long-term, it may inadvertently teach young adults to mis-manage or over-rely on credit later in life when it comes to credit cards, loans and mortgages.

Take control of your Credit Report

If you’ve used a buy now pay later scheme in the past, or you’re plan to in the future, check your Credit Report to see what could be affecting your finances. You can try checkmyfile free for 30 days, then £14.99 a month, which you can cancel at any time online, or via phone or email. You’ll see data from all 4 UK Credit Reference Agencies together in the same easy-to-understand format, including any credit accounts you hold, how you’ve paid them in the past and much more besides.

Updated on 02/03/2020 by Andrew Brown

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