If you’ve bought something online recently you will no doubt have been bombarded with different ways to pay at the checkout, including at least one BNPL (buy now, pay later) option. A few years ago, BNPL providers were relatively rare, but they boomed during the pandemic, when online shopping also boomed, and the market has taken off since then.

It means that now shoppers are often offered two, three or even four different BNPL providers at their virtual checkout, while some retailers have launched their own version to direct shoppers to. Debt isn’t a new thing, people have used credit cards and store cards for years, but the marketing and branding of BNPL makes it seem unlike traditional debt and there have been complaints that people aren’t aware of the fees involved and the implications for their credit file.

WHAT IS BUY NOW, PAY LATER?

It’s the newest form of debt that allows you to split the cost of items across different instalments. For example, Klarna, one of the biggest providers, let’s you split the cost of an item into three payments. So, if you buy a £30 item online, you could pay for it in three £10 instalments. No interest is charged during that time, making it very appealing to shoppers.

Other options allow to you to just delay the payment for a month, but you pay it all in one payment. BNPL were initially mainly used to help people who ordered lots of clothes from an online shop but were intending to return lots of them, because they didn’t fit or suit them.

It meant that they only had to pay for what they kept, rather than paying for it all upfront and then waiting for a refund. However, now the market has evolved and you can split the cost of almost any online purchase. Deliveroo recently added it as an option, so you can split the cost of your takeaway pizza into three payments, while at the other end of the spectrum Harrods has adopted Klarna, meaning you could split the cost of a £69,000 Bulgari watch into three instalments.

HOW BIG IS THE MARKET?

It’s tricky to put an exact size on the BNPL market as there is no central source for the various companies offering the service. But the Financial Conduct Authority says that use of BNPL quadrupled in the pandemic year of 2020 and that by early 2021 the market was worth £2.7 billion and five million people had used BNPL at some point in the previous year.

However, a report from Visa claims the BNPL market in 2020 in the UK was closer to £6.4 billion in size and that it was expected to grow to £37 billion by 2026. In comparison, the nation has £210 billion outstanding on all forms of consumer credit, so BNPL is still a fraction of that, but it is growing fast.

HOW DOES IT DIFFER TO NORMAL DEBT?

Traditionally you would apply for credit, fill out an application form and then be approved up to a certain credit limit (or denied). However, with BNPL the approval comes instantly, often with no reference to your credit report. It means that people can access the debt very easily, with critics claiming that the speed of the process means people aren’t always aware of what they are applying for. It also means that someone with poor credit history could be approved for BNPL debt with numerous different providers without more scrupulous checks.

Sue Anderson, from StepChange, a debt charity, says: ‘Buy now, pay later services don’t give individuals enough time or protection to stop, pause and understand the consequences of their purchase. Sometimes this even means people end up using BNPL at the online checkout without actually realising they have signed up.’

HOW DO BNPL PROVIDERS MAKE MONEY?

BNPL providers make money in two ways. They charge a payment processing fee to the retailer, much like a credit card company would. But many also charge late payment fees if you miss an instalment. Klarna, for example, charges a late fee of £5 if you miss a payment, or 25% of the order value if it’s less than £20. That late fee applies per payment instalment, meaning that you could be charged £10 in total if you’re late paying all three instalments.

Klarna does say it will give you warning that a payment is going to be made, will attempt to collect the payment multiple times and will give you 14 days after the payment is due before it charges the late fee. Laybuy, another large provider which lets people pay in six instalments, will charge a £6 late fee 24 hours after a missed payment and another £6 fee if payment still hasn’t been made seven days later (up to a maximum of £24).

Usually these missed payments will be recorded on your credit file, meaning you have a negative mark because of them. And ultimately with most providers, if you don’t pay the debt then it will be passed on to a debt collection agency.

IS THE MARKET REGULATED?

The market is not regulated but the Financial Conduct Authority has a proposal out about how it will regulate the market. Until now the market hasn’t come under the regulator’s authority and it’s taken a long time to even get a proposal.

The plans include BNPL firms checking that users can afford the loans, as well as making key information and charging structures much clearer to consumers. The regulator has also warned about potentially misleading advertising, so it will likely crack down on that area too.

On top of that, if the industry is regulated it means consumers can go to the Financial Ombudsman Service if they have a complaint with a provider. Launched in February, the consultation will last for eight weeks, and then it will take months longer before any plans are implemented.

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