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Citizens Advice: Young people spending above their means using ‘buy now, pay later’ schemes

A Citizens Advice poll of 2,000 “buy now pay later” (BNPL) customers in Britain found that almost 10 percent had been chased by a collection agency after using the service.

The latest research reported that 9.7 percent of customers had been pursued by debt collectors – a figure rising to one in eight people in the under age 34 category. Research carried out by the statutory body revealed that young people using the BNPL schemes don’t realise they are loans, and subsequently have been chased by debt collectors after falling behind on payments.

Citizens Advice called for companies to be more upfront with customers that are entering a credit agreement when using the BNPL service. BNPL services and apps, such as market leader Klarna, allow customers to purchase items and pay back the cost in interest free installments – but only if they keep up with the payments.

BNPL schemes have become increasingly popular with consumers (particularly the instagram generation) however critics argue such a system is driving many into an endless cycle of debt. Colourful, social-media friendly Swedish fintech company Klarna is currently leading the ‘buy now, pay later’ race; around five million people used its services last year, spending a total of £2.7bn.

Klarna is Britain’s biggest BNPL firm, and has grown quickly to become the most valuable financial technology start-up in Europe, with a valuation of $46bn (£34bn or €38bn) and a string of starry celebrity brand partnerships under its belt. Its innovative advertising campaigns have featured the animated character Pingu, and it boasts marketing deals with the likes of Lady Gaga and Queer Eye’s Tan France

In a 2020 press statement the market leader states:

“Klarna is the pioneer and global leader of buy-now-pay-later and the future of shopping. With 85 million+ customers and 200,000+ merchants, Klarna allows consumers to purchase products that enhance their day-to-day lives, while creating a smooother way to shop and pay.”

With the popularity of BNPL schemes rising, others want a slice of the pie. In August, London-based banking startup Revolut launched a service to allow its 16m users to drip-feed their wages over the course of a month, as opposed to receiving the money all at once.

However, critics have continued to voice serious concerns that people embarking on “buy now, pay later” spending sprees as a result of easy credit offered to them online have been plunged into mounting debt – after a boom in online shopping induced by a string of lockdowns since March 2020.

A review by the Financial Conduct Authority (FCA) earlier this year found that Klarna users could easily spend more than £1,000 online with few checks on whether they could actually afford the repayments. Christopher Woolard, who led the study, said the use of buy now, pay later schemes quadrupled between January and December 2020. Typically 75 percent of users were female.

Citizens Advice have now voiced their own concerns that the service encourages people to spend beyond their means and end up with unmanageable debts.

Four BNPL companies contacted by the charity – Klarna, Clearpay, Laybuy and Openpay – said they referred customers to debt collectors as a “last resort”. Research by Citizens Advice also revealed that shoppers were charged a staggering £39 million in late fees over the last year.

Citizens Advice also carried out ‘Mystery Shopper’ tests which found that only 11 percent of BNPL schemes warned shoppers they were entering into a credit agreement. A huge 89% of BNPL agreements only mentioned it in the small print of their terms and conditions.

Millie Harris, a debt adviser of Citizens Advice East Devon, commented on the research, stating that: “My concern is that people aren’t processing the fact that BNPL is credit. They don’t realise there are going to be consequences if they don’t pay – it gives them a false sense of security.

“I’ve seen people using it for their kids’ clothes and shoes that they would otherwise never be able to afford. They are taking out what is effectively a loan, but they don’t see it as one. For example, I helped someone who has tens of thousands of pounds of debt, but they don’t see BNPL deals as part of that total. It’s almost under-the-radar debt.”

The recent Citizens Advice poll of 2,000 (BNPL) customers also found that of those referred to debt collectors, 96 per cent reported it causing them sleepless nights; to ignore correspondence; to borrow money to repay the debt; or, make their mental health get worse.

The alarming new poll comes as a regulatory crackdown looms – and cannot come soon enough for financial and marketing experts concerned about the uncomfortable impact of BNPL schemes and the way they are advertised to young consumers.

A survey commissioned by BBC Three at the start of this year suggested that half of the respondents had seen influencers promoting buy now, pay later (BNPL) products online, and for one in eight of those social media users, this made them more likely to sign up.

In an interview with BBC Three, one social media influencer explained why she decided to turn her back on working with Klarna.

Oghosa Ovienrioba, who runs the popular instagram account @SincerelyOghosa, was initially excited when she received the email to work with the credit company, however she grew cynical and ended up ultimately regretting her decision to work with Klarna. The 29-year-old, who has over 30,000 followers on instagram, said that despite her posts being within advertising guidelines, a lack of clarity about how the BNPL service operates – and the potential drawbacks – meant she wouldn’t work with buy now, pay later services again.

“I read about how some young shoppers who bought items with Klarna had gone into debt and were struggling to get their credit score back under control. I was horrified at what I learnt and I felt this incredible pang of guilt at what I’d done, and what I’d supported and promoted.

“I knew I had a lot of younger viewers who looked to me for advice and I couldn’t believe my ignorance had meant I’d potentially encouraged them to make bad financial choices. Unfortunately by the time I’d found out all the relevant information, it was too late. I’d signed the contract and the content had to be put out.”

“My stomach was in knots. I knew, even as I posted, that I couldn’t work with them again. Young and vulnerable people use Klarna because it’s been supported by so many large brands and influencers. But many young people use it because they don’t have the funds to pay for these items, especially in a pandemic and in a recession.

Ovienrioba said she supported regulation of the popular credit provider: “Regulation means more information, more transparency and more protection for buyers.

A spokesperson for Klarna told the BBC at the time that Oghosa was not “directly promoting any financial products or services and therefore risk wording did not apply” and pointed out that Klarna “encourages our consumers to be mindful when they shop”

In response to the latest Citizens Advice poll, Alex Marsh, head of Klarna UK, said: “Unlike credit card providers who intentionally keep people in debt with minimum payments and high fees and interest, our credit products are interest and fee free and are designed to keep people out of debt with clear upfront payment plans.

“At Klarna we only ever use debt collection agencies to help us contact customers we are unable to reach and we do this on fewer than one per cent of orders…We encourage any of our customers whose circumstances have changed, to please get in touch so we can help you with a plan to get back on track.”

Georgina Whalley, Interim UK CEO and Group CMO, Openpay, also responded: “Openpay doesn’t use enforcement agents, bailiffs or any other form of in-person debt collection service. We do refer some outstanding arrears to a third party, but Openpay customers are only contacted via SMS, email and post – never in person.”

As reported the Telegraph, a spokesman for Clearpay stated: “Clearpay has never enforced a debt through enforcement agents or bailiffs. As a last resort, we sometimes pass information to a debt collection agency (DCA).”

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