"I had a payment that didn’t go through and went as a default on my ClearScore. I’ve emailed to remove as I paid it the next day as realised money hadn’t come out! no agencies got involved as it was paid in full, but with that one it’s still on my score."
BUY NOW PAY LATER IS THE NEW NORMAL
23% of 18 to 24-year-olds have turned to buy now, pay later services to fund their spending since the start of lockdown*
BUT MANIPULATIVE ADVERTISING PRACTICES AND A LACK OF INFORMATION IS
INCREASING THE RISK THAT YOUNG PEOPLE WILL GET INTO PROBLEM DEBT
45% of young people who have used a buy now, pay later scheme in the last year say they have missed at least one payment*
*Compare the Market
what is buy now pay later?
Buy now pay later (BNPL) is the name for a kind of credit payment (that’s debt to you and me…) that allows you to purchase goods, but pay for them either later or by instalments. In recent years, new digital payment providers have emerged, pitched at online shoppers who “wanna cop some new gear but can’t wait until payday”, as JD Sports puts it. They include Clearpay, Klarna, Laybuy and Afterpay.
The UK's most popular digital BNPL service is Klarna, accessible via thousands of online and high street shops from ASOS to SpaceNK to BooHoo. You can ‘pay later’ in just one click on pretty much anything, from a £4 scrunchie to some new sneakers. Whilst the value of these items might be small, the consequences of using these products incorrectly, are not. Of the issues we have identified we believe Klarna to be the most egregious.
How does it work?
The new online providers let their customers ‘spread the cost’ of shopping online.
Klarna has three products:
so what's the issue?
Klarna is a product designed to eliminate the 'pain of paying' and with young people in mind. Take a look at this screengrab from a recent campaign featuring their investor, Snoop Dog.
Klarna knows that BNPL gets people to overspend. On their website, they tell their retailers:
A customer's order value increases by 55% when
shopping with instalments
BNPL can be useful for consumers and used well, however, there is a risk that without better protection we'll see young people who already face the reality of a debt crisis and recession, under unmanageable financial pressure
Credit score contradiction?
*At the time of launching the campaign, there was clear evidence from Klarna retailers, supported by anecdotal evidence, that credit scores were damaged on non-payment. The campaign has since learned that Klarna's own website stated that non-payment of pay later products 'will affect your score' in June of last year. Klarna denies their 'pay later' products have ever damaged credit scores. The campaign is investigating these contradictions, has submitted this evidence to Klarna and will continue to update these materials.
We have identified two areas of concern which need addressing in order to mitigate thESE riskS:
1. MISLEADING ADS
BNPL ads do not contain appropriate risk wording, if any. Retailers, who are not regulated are also advertising BNPL products and with no risk wording.
BNPL providers use influencer marketing. Influencers are not required to include any risk wording on posts. Some fail to disclose #ads.
BNPL providers use emotionally manipulative advertising which implies that BNPL can afford you a certain lifestyle. See this Killing Eve ad and these Clearpay IG posts from Bare Minerals.
BNPL ads often confuse customers and take advantage of a lack of financial literacy. For example:
Klarna has three similarly named products. Two require a soft credit check which cannot impact your score upon application and another which requires a hard credit check which can impact your score on application. 77% of consumers do not understand the difference between soft and hard credit checks*. Klarna has previously stated on ads ‘no impact on your credit score’. This is confusing for consumers and also fails to acknowledge that ALL of their BNPL products can lead to your score being harmed when you fail to pay and that your debt will be passed on to a collection agency.
Klarna ads have also stated ‘no interest, no fees, never’. This does not apply to all products and is also confusing for consumers.
*TSB - Research conducted by OnePoll: 2,000 respondents.
2. LACK OF consumer protection
On several sites, BNPL is the default payment option. We've had reports from some consumers who've accidentally used BNPL
The FCA does not provide explicit guidance as to how the risks of BNPL products should be articulated fully, specifically damage to credit score or selling of debt to a collection agency.
The campaign has exposed a number of contradictions:
CREDIT SCORE DAMAGE
Klarna have said that credit scores cannot be damaged by their 'pay later' products, even when a payment is missed. This contradicts information provided by ASOS, H&M, Gymshark and over 20 retailers, available when the campaign was launched. Information that is still live on some of these websites.
Unless customers read the terms and conditions, there is no information about the consequences of non-payment at checkout. In fact, customers are given a false sense of security....
Klarna have stated that this was due to a change in terms and conditions but maintain that credit scores have never been damaged by their 'pay later' products.
The campaign later discovered the following information on Klarna’s own website (live until June last year, possibly later) which would explain the anecdotal evidence of credit score damage:
Either consumers have been given incorrect information or Klarna are covering up credit score damage, both possibilities are concerning. We will update this site once we have clarity on how these contradictions have emerged.
Since launching the campaign, Klarna have shared details about the procedures used by their debt collectors. They state that their debt collectors do not report to credit reference agencies. This contradicts information provided by Klarna's own customer service teams which informed the information on this page. Klarna has stated that this information was never accurate and they are retraining their customer service teams. The campaign asked Klarna for more details on their debt collection procedures. You can view the answers here. Klarna have said that their debt collectors do not report to credit reference agencies.
WHAT THE REGULATOR SAYS:
“We agree that information needs to be clear and comprehensible, although we do not consider it needs to be in a prescribed format or include worked examples. It is more important that firms have the flexibility to be able to tailor their communications for their customers, bearing in mind their knowledge of how their customers react to different forms of disclosure.”
THIS IS NOT ENOUGH
improve advertising standards
wANT TO SAY NA to BAD PRACTICE AND HELP PROTECT VULNERABLE CONSUMERS ?
Debt charity, StepChange has contributed to multiple reports on the risks of BNPL
Clare has been vocal about the risks of BNPL, sharing examples of malpractice on Twitter
MAS has some useful advice on in-store credit and BNPL
Who is behind this campaign?
Alice Tapper is the author and founder of Go Fund Yourself. You can learn more here.
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