Ticking time bomb of buy now pay later

More than 3m UK households owe £2.7billion on ‘buy now, pay later’ (BNPL) borrowing, according to a new analysis by economists at the Bank of England.

The figures, which showed those aged between 25 and 34 were the most likely to use it, shed light on the extent of the unregulated practice.

And they suggest users are more likely to be financially vulnerable – likely to raise concerns of a ticking time bomb for borrowers. Experts warned some shoppers were using BNPL without understanding the burden they were taking on.

Labour MP Stella Creasy, who is fighting for tighter regulation, said: ‘For years we have been warning of the dangers of BNPL credit, and the need to act before these legal loan sharks become the next Wonga-style scandal. This data again shows why the Government’s refusal to regulate them is inexcusable.’

Two Bank of England economists, Gerry Gunner and James Waddell, analysed findings from a survey by the Bank in March 2023.It found 11 per cent of households, or 3.1m across the UK, reported owing money on BNPL.

The average balance was £866, implying £2.7billion is owed.

Many reported balances of a few hundred pounds or less but a few reported much larger sums owed, according to the findings, which were published on the ‘Bank Underground’ blog where Threadneedle Street staff post unofficial research.

The report said younger people and those who rent are more likely to use BNPL – both groups which tend to have less resilient finances. And 68 per cent of users are concerned about their borrowing, compared with 45 per cent of other borrowers.

BNPL users are also more likely fall behind on repayments by two months or more. And 21 per cent report having been in arrears compared to 6 per cent of other borrowers. BNPL lets borrowers buy goods or services and pay back in instalments.

Many, often offered by start-up fintech firms, are not regulated as they do not charge interest on the repayments, instead charging retailers a fee. Some of these also charge borrowers for late payments.

Some established lenders also offer BNPL products which charge interest and are regulated. It is often offered as an option alongside online shopping, and is also seen as likely to be popular with poorer borrowers as providers do not have to carry out affordability checks.

However the research found no clear link between usage and household income, with the those earning £45,000-£54,000 most likely to report usage.

And the richest fifth are likelier to have loan balances of £2,000 or more. The report said there was little publicly available data on BNPL use as much of it is unregulated.

Klarna, a major player which was founded by Sebastian Siemiatkowski said this week that it had 18m UK customers, though it also offers other payment services.

Campaigners have sounded the alarm over BNPL’s growth. Rocio Concha, director of policy and advocacy at consumer group Which?, said regulation was needed to protect them.

‘With several providers not offering clear information of the risks attached to using BNPL, such as the potential to fall into debt or the consequences of missing payments – including considerable late fees – some consumers are entering into agreements without the full picture.’