Buy Now Pay Later (BNPL) services have exploded in popularity lately, with almost 4 in 10 Brits saying they’ve used them. But with lots of people using these sites to get themselves into unmanageable debt, why is investing seen as a more risky use for your cash?
Let’s face it, many people are wary of investing. It’s seen as a scary word, which might be why 67% of us don’t do it. But for some reason, society has been massaged over several decades into making purchases instantly and putting off the payments until later and consider this ‘normal’.
Of course, if you’re using these services sensibly and spending within your means, they’re harmless. But with 30% of people using BNPL for purchases they couldn’t otherwise afford and 56% admitting to having fallen behind on making a payment, it seems they’re anything but.
When it comes to rules, where’s the consistency?
The FCA exists, in its own words, to “protect consumers from the harm that can be caused by bad conduct in the financial services industry.” Yet investors continue to fund businesses that mislead consumers and actively encourage them to get into debt. From BNPL services to credit card providers offering air miles in return for excessive spending, plenty of financial businesses have money – not customers – at their heart.
Think about the risk warnings on investment websites. The regulatory framework is (quite rightly) strict on the type of disclaimers you have to include when advertising investments. Nutmeg, Freetrade and Wealthify’s websites all warn you that “with investment, your capital is at risk”. They don’t do this for fun – it’s an FCA requirement.
But what risk warnings are BNPL sites required to provide? Take Laybuy’s website. There are no warnings on its homepage. You have to deliberately seek out this information. In other words, if you’re not looking for it (which many people aren’t), it’s very easy to make a purchase using Laybuy with no idea of the consequences.
And looking at Klarna, interestingly, not all of its products are regulated. Scroll to the footer of the website and you’ll find “Klarna’s Pay in 3 instalments and Pay in 30 days products are not regulated by the FCA.” Though they offer up little to no information on why this is.
Not all debt is created equal
When you invest, you’re told that the value of your investments could go down as well as up and that you might get back less than you put in. This is a fairly well known fact, and is likely why some people are reluctant to dip their toe into the world of investing. But you can never lose more than you put in (with the exception of leveraged platforms).
And while you can’t lose all of your money using BNPL, if you can’t pay back what you owe, you could easily end up owing double the price of whatever you’ve bought, depending on the interest rate. Klarna, for example, charges 18.9% interest on purchases. That’s a lot of interest for something that’s not essential, such as a new pair of shoes or a TV.
You can even buy something as expensive and non-essential as flights now thanks to companies like Fly Now Pay Later (which has just been granted £10 million in funding). You can buy up to £3,000 worth of flights and pay it back later, but only in the website’s small print does it tell you about the representative APR: a massive 51.8%.
So when investing, you’re by no means shielded from losing your money. But when you take out credit, you could very quickly get yourself into a financial situation you weren’t prepared for.
Instant gratification is hard to resist
One of the golden rules of investing is to think long-term. That’s because the stock market has been found to perform better than cash in 91% of 10 year periods, so it’s safer to play the long game.
Retail credit, however, is short-term. If you want something tomorrow (or even today) you can order it online, have it delivered to you within hours, and forget about the cost until you’ve forgotten what you even bought.
BNPL companies encourage people to take on debt with everyday purchases which helps to desensitise the process and reinforces the message that this mindset is normal. Unsurprisingly, clothes were the most popular type of BNPL purchase during lockdown. Why is this instant need for material possessions overriding our need for sensible financial habits?
Look at Klarna’s website. The only things it advertises on its homepage are clothes and beauty products. Clearpay does have a section on responsible spending, but it’s buried in the footer of its website. Not so clear, after all. You can generally get some kind of interest-free credit on essential items like washing machines, which explains why people are using credit for luxuries instead.
Is it just a generational thing?
BNPL is most popular amongst millennials, with 54% using this payment method. And hot on their tails is gen Z.
It’s no surprise that these generations have been taken in by the clever concept. “Klarna, Clearpay and Laybuy are all highly active on social media, marketing themselves to millennials and generation Z, to great effect” according to Georgia-Rose Johnson for Finder.
I’d bet that our parents aren’t your typical Klarna users. Think back to 40 or 50 years ago. You’d have had to save up if you wanted to buy something – there was no other option – and that mentality tends to stick with you. Now, you can buy something instantly on credit and pay for it later (or ignore the payment reminders and risk falling into spiralling debt). Seriously, when did we start needing to get into debt to buy soap?
BNPL companies are just tapping into younger generations’ need for instant gratification and their fear of missing out. And it feels quite wrong – especially when you read about this debt charity, who found that nearly half of its new customers in 2020 had BNPL debts.
Is regulation enough?
The regulation of BNPL services, which was announced back in February, is a step in the right direction. Under the new rules, lenders are required to carry out affordability checks on customers and make sure the vulnerable are treated fairly. But is it enough?
The regulation campaign was spearheaded by Alice Tapper, who saw BNPL as particularly dangerous during the covid pandemic thanks to its exploitation of vulnerable people, as “there’s always a risk that shopping is used as an ‘emotional fix’.” But some of these credit companies are using sneakier tactics to ensure their continued success. Klarna, for example, launched a campaign last year telling shoppers to ask themselves “Do I love it? Will I use it? Is it worth it?” to encourage them to spend more mindfully. At the same time, it was marketing itself to retailers as helping customers spend more, and more often.
Ultimately, BNPL needs the same level of regulation and scepticism as investing. People should know what they’re getting themselves into – that they’re taking on debt – when they shop using BNPL.
Should risk warnings on investments exist? Absolutely, and the FCA and company ethics should push people to invest only within the means of their situation. But the same should apply for BNPL – or anything that promotes unnecessary spending and problematic financial habits. Whether it’s by regulation that bans companies from advertising beautiful photos of models flaunting products you can have that same day without paying for them, or stricter KYC (Know Your Customer) procedures, the balance needs to be tipped.
When you invest, you’re making a decision to look out for your future. When you use a BNPL service, you’re making a decision that benefits you right now. Given investing seems like the more shrewd move in this scenario, it makes no sense that the two are treated so differently from a regulatory perspective.
Consider this: what’s the societal impact of people becoming more comfortable with investing vs becoming more accustomed to using credit to fund their fast fashion addictions?
It’s a no brainer.