UK credit risk to quadruple

Ministers are being urged to intervene on the rise of unregulated "buy now, pay later" credit after UK consumers spent up to £1.7bn a month online using such deals.

Debt counsellors warn that many people are resorting to deferred payments to buy household essentials regularly. Any consumer who then misses a payment risks seeing their case handed over to debt collectors.

The "buy now, pay later" market has more than quadrupled in size since 2020 and is expected to reach a record total of £30bn this year. Campaign groups are demanding urgent action to regulate the sector.

Morgan Wild, interim director of policy at Citizens Advice, said: “Three years after the government promised 'buy now, pay later' regulation as a matter of urgency, this much-needed regulation has ended in the long grass.

“In that time, utilization has rocketed, and our frontline advisers are now seeing three times as many people who need help paying off their debt as a result. Many of them need emergency assistance, such as food bank vouchers, which is ringing alarm bells that lenders are failing to protect people from the risk of unmanageable credit."

Figures compiled by Adobe Digital Insights, which tracks tens of millions of retail transactions each month, reveal that "buy now, pay later" accounted for more than £1 in every £7 spent online in the first three months of 2024.

Total online spending under the deal in 2023 was £16.7bn, with monthly spending from £1.09bn to £1.75bn, according to figures provided to the Observer. An estimated further £9bn was spent on "buy now, pay later" benefits in the same year.

The option to defer payments has been available for more than a decade but became more popular during the pandemic as people relied more on online shopping and demand for credit was strong.

A review by Christopher Woolard, a former interim chief executive of the Financial Conduct Authority (FCA), found that the deals were a "meaningful alternative" to payday loans, but represented "significant potential consumer harm".

Woolard recommended in its 2021 report that the law be changed "as soon as possible" to ensure all such products are regulated by the FCA.

The Observer revealed in January 2022 that shoppers were being urged to use "buy now, pay later" for their grocery shopping as a way to deal with "difficult times". Credits were being promoted on items such as salmon fillets, pet food and takeaway pizzas. A pack of 24 cans of R White's Lemonade was promoted with a "first payment" of £1.75.

The Treasury published draft legislation proposals to regulate the sector in February 2023, but the proposals have not been implemented. The government is now under pressure to take action.

A report by Citizens Advice last November revealed that 35% of people who regularly use "buy now, pay later" deals have used the facility to pay for groceries. It also found that over 12 months, one in five deals missed or delayed payments.

Labor MP Stella Creasey, who has called for the sector to be regulated, said: A year after the government consulted on “buy now, pay later” regulations and four years after parliament and the regulator agreed that action was needed, it is clear that the delay [ being used] to drive more people into unsustainable debt.

“Consumers are unable to even go to the Financial Ombudsman if something goes wrong, this unsecured debt should not have been allowed to grow as it has, and we are now seeing people paying the price during a life crisis. "

Jo Cox, senior policy officer at campaign group Debt Justice, said: “Some people who are already in financial difficulty are turning to 'buy now, pay later' because they have exhausted other options, but this can drag them into even more dangerous directions. Debt spirals that can take years to recover from. These borrowers deserve the same legal protections that come with all other types of consumer debt."

Major "buy now, pay later," industry providers say deferred payments are popular with customers, who can typically pay for their purchases in three or four interest-free installments. An Experian report last September found that the number of people defaulting on payments was low.

Newcastle University Business School marketing lecturer Dr Jane Brown, who researches the use of "buy now, pay later" products, says many consumers are happy with the products, which offer flexible measures to help people manage their money. But he cautioned that it's easy for consumers to underestimate how much they're spending.

“People don't just have 'buy now, pay later' deals, they also have credit cards and bank loans. Once it starts running away, grab the reins again hold on.”

A spokesman for major provider Klarna said: “We have several safeguards in place to protect consumers and ensure they can pay, including robust credit checks on every transaction and our ability to stop loans if payments are missed. Restricting Services. Prepared. These guardrails work because our loss rates are 1% - 30-40% lower than what you see on credit cards."

Klarna said only 0.6% of transactions were referred to debt collectors, who were not allowed to add interest. The agency added that it supports regulation of the sector.

Zilch, another provider, said it was already regulated under an innovation program with the FCA.

A company spokesman said: “It's time to take control to close the loophole. When consumers are properly protected, ['buy now, pay later'] is a valuable and low-cost alternative to high-interest credit cards."