Buy-Now-Pay-Later Schemes: New Regulations

The UK will soon put policies in place to help control the number of young people going into debt. This decision came after a review found that 1 in 10 customers of a major British bank had been in arrears after using buy-now-pay-later (BNPL) services. Also known as point-of-sale credit solutions, BNPL schemes allow you to purchase a product and pay for it at a later date.

While these kinds of payment plans are useful for those who do not have the money to pay for something upfront, organisations such as Citizens Advice are wary of BNPL and fear it pushes more people into debt. They liken such schemes to quicksand in that they’re easy to get into, but difficult to pull yourself out of.

How will buy-now-pay-later schemes be regulated?

One way the government will prevent debt is by encouraging companies that offer payment plans to report their customers’ usage data to credit bureaus.

While new rules will not go into effect until 2023, some companies are already changing their reporting policies. For example, Klarna, the hugely popular BNPL firm, will now tell creditors which of their customers are paying on time and which are not.

Because Klarna allows customers to buy from large retailers like H&M, ASOS, and Boohoo, it has become the UK’s most used company of its kind. In the UK alone, Klarna has around 16 million customers.

The US may implement similar policies. The country’s Consumer Financial Protection Bureau has begun investigating BNPL firms like Klarna and Affirm for fear that they are causing more debt, specifically amongst millennials and Gen Z.

Starting June 1, British credit agencies and banks will be able to view the spending habits of the company’s customers. This change will apply to Klarna’s plans that allow customers to pay their debt either in 30 days or 3 months without incurring interest. The new rule expands a policy that is already in place which shares when customers use Klarna for long-term loans that range from 6 to 36 months. These longer plans accrue interest.

Klarna had already been working on changing their policy in the two years prior to the government’s announcement. The company has been outspoken about their opposition to high interest and late payment fees the credit card industry places on shoppers. The company says the move could either help or hurt customers applying for mortgages and other loans. However, they are hopeful their competitors will follow their lead and facilitate better spending habits. Former Twitter CEO Jack Dorsey has yet to confirm whether his company Block plans to take similar steps for their firms PayPal and Clearpay.

How will these changes affect consumers?

It is important to keep abreast of these changes so as to not let it impact you severely. The best way to avoid increasing your debt with BNPL schemes is to not miss a payment. If you do not clear your debts in time, some providers will either require you to pay a settlement fee or a lump sum of interest. Additionally, late payment fees may be charged. As aforementioned, Klarna will be reporting any missed payments, and other companies will likely follow suit.

To ensure your credit score is not affected and your debt is cleared before interest is applied, it is a good idea to set reminders and alerts for yourself. Otherwise, these slip-ups may show on your credit report for several years. This can affect future applications for credit cards, loans, etc.

While BNPL has the potential to negatively impact your credit score, it could also improve it if your repayments are made on time. Using these schemes proves to lenders that you use credit responsibly and are thus a reliable borrower.

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Should I avoid buy-now-pay-later?

Credit reporting is often viewed as a punishment for borrowers. However, it is also a way to incentivise healthy financial habits. For example, those with thin file credit, such as the underbanked and recent immigrants, can use BNPL as a tool to build their credit. Once these new practices begin, consumers will be able to build their credit with BNPL instead of having to take out high-cost credit cards, which may sink them into more debt, just to prove they are responsible.

If you do not want to use BNPL, an alternative would be to apply for a credit card that offers an interest-free deal which allows you to pay for your purchases over several years. Some may find this option more useful than BNPL companies like Klarna because these credit cards can be used in most stores. In addition to this, the cost can be spread across multiple items instead of just one.

The success of the buy-now-pay-later sector is largely due to easy application processes and a lack of regulatory oversight. As the change means shoppers’ credit history will be affected, they may be deterred from using these services. This begs the question of how investors in buy-now-pay-later firms will fare once the tighter clampdown begins.

If you have any questions about how Private Client Consultancy can help you diversify your portfolio or with any other financial needs, please contact us today.