This week, we kicked off a new 5-part webinar series for university and college staff all about how best to support students with financial risk. Our focus for session one, with the help of expert guest speaker Alice Tapper, was all things Buy Now Pay Later (BNPL).
Alice is the creator of Go Fund Yourself, which over the last 3 years has grown into a community of over 45,000, a published book and a weekly column with Glamour magazine. GFY aside, Alice is a financial campaigner and recently launched the successful #regulateBuyNowPayLater campaign, which led to the FCA’s decision to bring BNPL products under their remit. Alice is also the BBC Morning Live finance expert.
In conversation with Vivi, Alice covered a range of topics under the BNPL umbrella, including whether all BNPL services are bad, how providers differ in terms of risks and implications of missed payments, and how staff can best support students when it comes to BNPL. Here’s a summary of the conversation.
Why do support staff need to pay attention to BNPL?
Buy Now Pay Later (BNPL) is the fastest growing online payment method in the UK and 50% of Gen-Z are already using it! The pandemic has been a real accelerant of this, and the number of people using BNPL has exploded over the last year.
So it’s becoming increasingly important that support staff are not only fully aware of BNPL and the risks it carries, but that they also feel equipped to discuss the topic with students and offer support to those who may have missed repayments or lost track of their BNPL purchases.
“I lost track of the stuff I bought on Klarna and Paypal instalments.”
So what are BNPL services and how do they work?
What is Buy Now Pay Later?
The term ‘buy now pay later’ and the concept of buying something but deferring payments has been around for years. But it has evolved and we’re now talking about a new type of BNPL that has been in existence in the UK for approx the last 5 years.
In a nutshell, BNPL is a type of financial service that’s integrated into online shopping or e-commerce. The main providers are Klarna, Clearpay, Paypal and Laybuy.
What happens is when you go to buy something online, instead of paying with a debit card, you’re given the option to either:
- Pay later e.g. in 30 days
- Split your payment e.g. into 3 instalments
The minimum age to use these products is 18, but there have been cases where they’ve been used by those younger.
The two camps of Buy Now Pay Later
There are two types of BNPL:
- No interest BNPL – this is the most widely available type of BNPL and is integrated with most fast fashion websites. These are generally unregulated and have been the focus of the #regulateBuyNowPayLater campaign.
- Interest charging products – these are regulated and are generally only available on higher price point items. When it comes to Klarna, this is called ‘Klarna Financing’.
From now on, we’ll mainly focus on the no interest BNPL products – the one that students are using the most.
How do BNPL providers make their money with no interest products?
Aside from charging late fees when payments are missed by consumers, in the case of no interest BNPL, the provider charges the e-commerce business site a percentage of the sale. This is how the BNPL providers have grown so quickly and become so integrated into online shopping.
Are all BNPL services ‘bad’?
We need to be mindful of any ‘moralisation’ around debt and ensure we’re not ‘debt shaming’ those who choose to use BNPL services. As with any financial product, BNPL services are neither inherently ‘bad’ or inherently ‘good’. It’s about how the individual uses them as to whether they’re right – or good or bad – for that person and their circumstances.
BNPL is not necessarily better or worse than other options, it’s just different, and there are potential implications that people need to be aware of before deciding to use it. BNPL services can be really useful for some. And given that many of them charge no interest, you could argue it’s a better option than accruing high interest through a credit card.
But the issue with BNPL is how the services have been marketed – adverts have previously promoted messages such as ‘why wait until payday?’ or ‘no money, no problems’. The reason that students, in particular, need to be aware of the risks of using BNPL is that they may not be the most practical option for someone with a fluctuating income – and there are risks involved.
“I’ve lost track of my klarna!”
What are the risks of using BNPL?
Putting aside the interest charging products (that among other things, can have a big impact on your credit score), there are also risks associated with using no interest BNPL services – although they might not seem as obvious at first glance.
It’s important to stress that risks vary from provider to provider so research is needed beforehand. Companies like Which? can help to break it all down. But some of the main ones include:
The final threat will be the same for nearly all BNPL providers; if you consistently fail to make a payment, you will eventually end up in the hands of a debt collection agency. It’s what happens before the debt collection stage that differs.
Late payment fees
Some providers, including Clearpay and Laybuy, will charge late payment fees. These fees are capped, but it’s worth being mindful of them because they can add up to be a relatively high percentage of the item cost – especially if BNPL was used on a lower price item.
Damage to credit score
If you’re thinking of using BNPL, it’s worth going directly to the provider to check whether or not a missed payment will damage your credit score.
While many BNPL providers claim they won’t damage your credit score or report you to a credit reference agency, they do have the ability to if payments are late or not made. And it’s not necessarily a good thing if they don’t!
In fact, one of the big issues highlighted by the #regulateBuyNowPayLater campaign is that there needs to be better affordability checks by the providers – checking credit score history is a way to do this, but it’s only useful if any instances of struggling with credit show on the check. Some providers, like Laybuy, already do.
Upselling of interest charging products
Many providers also have interest charging products and the marketing between the two isn’t always clear. In fact, many young people aren’t aware that these providers have interest charging products at all.
It might be possible for someone to think that an interest charging product was quite similar to a no interest one, then potentially end up down the road of high repayments that they can’t keep up with.
Will relying on BNPL build ‘bad habits’ later in life?
Not necessarily but it’s important to note that for many young people, BNPL can be their first interaction with credit. And of course, all credit can be harmful if it becomes out of control.
So, when you combine this fact with the way that these products are talked about on social media and the positive language used to promote them, that’s where the risk lies – especially as they have been previously unregulated.
It’s also important that students understand that banks make their money by people taking on debt, so there’s real value in seeking unbiased and impartial advice.
The ‘good’ vs. ‘bad’ debt debate
In our system, you need to get into debt to be able to prove you can manage debt! This has led to the belief that having a credit card is a good thing, whereas it can be a terrible mistake for someone who isn’t ready for it and doesn’t understand it.
As a general rule of thumb when thinking of applying for credit, it’s worth considering what the item is. Providing you can afford it in the long-term, debt can be worth taking on if the item is either:
- Something that’s going to appreciate in value – such as a house
- An investment – for example, going to university can be a good investment in your future and increase earning potential
- Something that is absolutely needed – e.g. a car in order to get to work
Hindering saving habits
While credit can be useful – like in the examples given above – it’s also necessary for young people to learn saving skills. The ability to use functions like BNPL don’t help with this, but saving is still necessary in today’s world – you can’t use BNPL for a house deposit for example!
With increased use of products like BNPL, there could be the chance that future generations aren’t able to develop saving skills or put away a little bit of money each month.
How can staff best have conversations with students about BNPL?
It’s important to always keep in mind that there are some students for whom BNPL will be incredibly helpful in certain instances.
So for support staff, it’s key that no judgement comes across. Perhaps starting a conversation with an acknowledgement such as: “It’s interesting that you’re using those, I’ve seen them advertised but haven’t used one yet myself.” This, followed by a question like: “How are you finding them?” or “How are you managing them?”, could help nudge students towards resources that will help them understand the risks of using them, or give a gentle warning e.g. “They can be a fantastic tool but some of them can damage your credit score so it’s worth just being really mindful of how they differ from provider to provider.”
There are really three considerations when it comes to choosing to use a BNPL service, so prompting students to think about the following could also be a good way for staff to offer support without judgement.
Question 1: What’s the reason for using BNPL?
Firstly focusing on the motive for using a BNPL service. Is it a question of just postponing the ‘pain of paying’? If so, this isn’t really a responsible way to choose the option. On the other hand, it could be because something is needed but paying for it in one lump sum isn’t totally feasible – in these instances, BNPL can be incredibly helpful.
Question 2: Is the repayment process, and any consequences of missing payments, understood?
Choosing to use BNPL can be risky if the decision is uninformed, and providers aren’t always brilliant at making honest information about how their products work available.
So it can be easy for someone to get involved with BNPL without fully understanding how the repayment process works, as well as any consequences of missing payments. It can be complicated too – there are multiple providers who all have a different user experience.
Question 3: Is the item really needed? And can it be afforded?
Considering here the necessity of the item – again, maybe thinking about whether it’s a good investment, something that will appreciate in value or absolutely needed (perhaps like a laptop or a desk to do uni work).
If that’s the case, then putting some thought towards affordability is necessary too – is there at least some idea of where the money will come from, and when, to pay for it in the long-term?
How can students keep track of any BNPL they have?
Lenders aren’t always incentivised to give the user the best experience in terms of making payments and as of yet, there isn’t an easy way to see all BNPL across multiple providers. So it really is up to the student to stay on top of any BNPL they have.
There are tools that may help to an extent. For example, open banking money apps like Emma and Cleo enable you to see subscriptions across multiple places and payments that might be due. Another good idea is to check whether the BNPL provider has an app – that might help in terms of seeing payments that are coming up.
But by far the most useful will be to use something like an Excel spreadsheet or even pen and paper to make a list of all the BNPL products used and upcoming payments. Most importantly, make sure to record all payment dates, then put those in a calendar and set reminders too!
Is there anything else support staff should be aware of when it comes to BNPL?
Impact on mental health
There’s a strong psychological effect of BNPL products that can cause someone to spend more money – Klarna previously claimed that customers who pay in instalments spend 55% more.
Of course, we also need to consider the impact of losing track of BNPL repayments on students’ mental health. It’s unethical to suggest that shopping can be a remedy to emotional or mental health challenges, and that’s exactly what happened in a Klarna advert (that was thankfully banned by the advertising watchdog!).
In fact, we know the opposite to be true – research has shown there’s a correlation between money worries and mental health struggles.
Integration into social media
It’s important to be mindful of how integrated BNPL products have become into social media. Not only are influencers and ‘finfluencers’ now being paid to promote BNPL, but it’s also possible to shop using a BNPL service within Instagram – without even going to the company’s website!
It’s important for everyone, support staff and students alike, to be aware of this integration and the overlap between using social media and spending money.
Resource for students
This free, downloadable factsheet for students covers the advantages and risks of Buy Now Pay Later, plus all the essentials to know if you’re considering using a BNPL product including how it works and how BNPL providers make their money.
Watch the recording
If you’re looking for a free resource about BNPL to share with students, this free, downloadable factsheet covers all the basics.
The second session in this 5-part webinar series will take place on Tuesday 8th June at 10.30am. The focus will be on illegal lenders and loan sharks and we’ll be joined by expert speaker Steve Ward from the England Illegal Money Lending Team. Register your free place now.
And don’t forget to sign up to our staff email newsletter to be first to find out about upcoming staff webinars and get free financial wellbeing resources to share with students.