Ministers are being urged to intervene over a surge in unregulated “buy now, pay later” credit after the amount UK consumers spend online using such deals rose up to £1.7bn a month.
Debt advisers warn that many people are routinely resorting to deferred payments to buy household essentials. Any consumer who then misses payments risks seeing their case turned over to debt collectors.
The volume of 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 on from the government promising to regulate ‘buy now, pay later’ as a ‘matter of urgency’, this much-needed regulation has ended up in the long grass.
“In that time, use has rocketed, and our frontline advisers are now seeing three times as many people who need help to repay their debts as a result. Many of them require emergency support, like food bank vouchers, which is ringing alarm bells that lenders are failing to protect people from the risk of unmanageable debt.”
Figures compiled by Adobe Digital Insights, which tracks hundreds of millions of retail transactions each month, reveal that “buy now, pay later” deals accounted for more than £1 in every £7 spent online in the first three months of 2024.
The total online spend in 2023 under the deals was £16.7bn, with monthly expenditure between £1.09bn and £1.75bn, according to figures provided to the Observer. An estimated further £9bn was spent in physical shops offering “buy now, pay later” facilities in the same year.
The choice 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 at the Financial Conduct Authority (FCA), found that the deals were a “meaningful alternative” to payday loans, but represented a “significant potential consumer harm”.
Woolard recommended in his 2021 report that legislation be changed “as soon as possible” to ensure that all such products were 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 cope “with difficult times”. Credit was being promoted on items such as salmon fillets, pet food and takeaway pizzas. A pack of 24 cans of R Whites lemonade was promoted with a “first payment” of £1.75.
The Treasury published proposals on draft legislation 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 a 12-month period, one in five users of the deals had missed or been late with a payment.
Labour MP Stella Creasy, who has called for the sector to be regulated, said: “A year since the government’s consultation on “buy now, pay later” regulation closed, and four years since parliament and the regulator agreed that action was needed, it is clear that the delay [is being used] to drive more people into unsustainable debt.
“With customers unable to even go to the Financial Ombudsman if something goes wrong, this unsecured form of debt should not have been allowed to grow as it has, and we are now seeing people already suffering during the cost of living crisis paying the cost.”
Joe Cox, senior policy officer at campaign group Debt Justice, said: “Some people who are already in financial difficulty turn to ‘buy now, pay later’ because they have run out of other options, but this can pull them further into a dangerous debt spiral that it can take years to recover from. These borrowers deserve the same legal protections that come with all other types of consumer credit.”
The major “buy now, pay later” industry providers say that deferred payments are popular with consumers, who can usually pay for their purchases in three or four interest-free instalments. A report by Experian last September found that the number of people defaulting on payments was low.
Dr Jane Brown, lecturer in marketing at Newcastle University Business School, who has been researching the use of “buy now, pay later” products, said that many consumers were happy with the products, which offer flexible arrangements to help people manage their finances. But she warned that it is easy for consumers to underestimate how much they are spending.
“People do not just have ‘buy now, pay later’ deals, but also credit cards and bank loans. Once it has started to run away, it’s difficult to rein back in.”
A spokesperson for major provider Klarna said: “We have a number of safeguards to protect consumers and ensure they’re able to meet repayments, including robust eligibility checks on each and every transaction and restricting our services if there are missed payments, to stop debt building up. These guardrails clearly work as our loss rate is below 1% – 30-40% lower than what you’d see on a credit card.”
Klarna said that just 0.6% of transactions were referred to debt collectors, who were not allowed to add interest. The firm added that it supported the regulation of the sector.
Zilch, another provider, said it was already regulated under an innovative programme with the FCA.
A spokesperson for the company said: “It’s time to regulate to close the loophole. When consumers are properly protected, [‘buy now, pay later’] is a valuable and lower-cost alternative to high-interest credit cards.”
