3 February 2021

The drive to regulate buy-now-pay-later reeks of snobbery

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‘Buy now, pay later’ schemes have become a staple at the bottom of online shopping checkouts. Used by millions of people accounting for £2.7 billion in transactions, it’s no wonder they’ve caught the eye of the regulators.

The Financial Conduct Authority announced on Tuesday that they would be formally cracking down on ‘buy now, pay later’ [BNPL] providers, such as Klarna and Clearpay. Campaigners claim that BNPL schemes entrap consumers into spending money they don’t have on things they can’t afford, and glamourising debt. However, for most consumers, Klarna and the like provide a valuable service, with few risks attached.

Klarna is perhaps the most ubiquitous due to its Instagram-quality branding and association with fast fashion retailers. The buy-now-pay-later company offers consumers the option of spreading the cost of their purchase over three interest-free instalments over the course of three months. They also offer the option of deferring payment for 30 days entirely, say if you think you might end up returning the product or are just a little short this month. For a more in-depth option, you can finance your purchase and pay over the course of 6-36 months. This option isn’t interest-free and comes with a credit check. All of these options can be managed through an app, with notifications for payments sent right to your phone.

Now, those of us who are lucky to be liquid enough to pay upfront for our shopping may not see the need for such services, or feel it’s right they’re cracked down on. After all, anyone who uses such services must already be vulnerable and bad with money, right? Not so.

Millions of people who are using BNPL schemes are doing so responsibly and infrequently. Perhaps they don’t have large amounts of expendable income at the end of the month but would still like to buy a loved one a nice gift. Maybe they know they’ll be able to pay off a bigger purchase like a laptop, but would just like to lessen the blow over a few months. Or possibly they were suddenly faced with a large emergency purchase, like a replacement washing machine and didn’t have time to save in advance. There are countless reasons why someone would choose to use a BNPL scheme to spread out costs, not all of which are because of poor spending or saving habits.

However, as is all too common when discussing financial services, people who find themselves in debt look for something or someone to blame. It’s understandable, debt can be debilitating and soul-crushing and hard to recover from, but the availability of services like Klarna are not the primary culprits.

It makes sense to protect consumers from malevolent actors and extortionate rates. But loan sharks, these are not. In any case, BNPL providers have incentives for providing reliable, clear services. They can’t have their customers defaulting on payments anymore than any other credit provider. If customers are constantly defaulting on their loans, the credit providers and their creditors go bust as well.

It’s only right for BNPL schemes to have protections in place, against fraud and communication with credit regulators and competitors to spot problem behaviours. These are small steps that can be taken to ensure that these providers can continue offering a valuable service to millions of consumers. But instead, we’ve seen another knee-jerk reaction to disruptive financial services, resulting in limited competition and potentially the removal of valued services entirely.

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Morgan Schondelmeier is Head of External Affairs at the Adam Smith Institute

Columns are the author's own opinion and do not necessarily reflect the views of CapX.