Christmas might just be the most wonderful time of the year, but it’s also the most expensive. The presents, the turkey and everything else needed to make it a celebration to remember quickly add up, but as the old saying goes: you can’t put a price on happiness. In recent years, however, the festive season has become more affordable thanks to the rise of buy-now-pay-later services. Allowing customers to split large costs across several smaller payments, the likes of Klarna, Clearpay and Payl8r have funded the nation’s festivities and now’s the time for people to start paying back what they owe. Unfortunately, this comes at a time when Omicron is surging through the UK and the NHS is once again at breaking point. With our elected leaders remaining tight-lipped on what to expect, many will be left fearing the devastating effects that further restrictions might have on their ability to meet scheduled repayments.
The key benefit of a buy-now-pay-later service is that, should the customer make their repayments on time, they will not be charged any interest. Missed repayments will incur fees, but in the first instance these businesses operate by taking a cut of any payments made via their platforms; retailers recognise that buy-now-pay-later services encourage consumers to spend money that they simply could not afford to otherwise. However, put simply, the shopper is accruing debt.
Another major perk of using buy-now-pay-later services is the lack of risk to one’s credit score. To take Klarna as an example, only their financing option (available for larger purchases to spread the repayment across a matter of months rather than weeks) will result in a hard search on a customer’s credit file. Other options including ‘Pay in 3 instalments’ and ‘Pay in 30 days’ only result in a soft check. This means that other lenders will not be able to tell whether or not you have taken out finance with competitor buy-now-pay-later companies. Although each company may install a credit limit to dictate how much debt a customer can go into, that will not prevent an individual creating accounts with multiple service providers. Where a retailer works solely with one buy-now-pay-later company, owning accounts with multiple companies becomes necessity rather than choice. Start adding together the credit limits on each account and suddenly the total debt is substantial.
With England currently under instruction to work from home and the governments of the devolved UK nations having already introduced their own further restrictions, the beginning of 2022 is set to be difficult for many businesses. There is still the threat of further restrictions, but a Tory rebellion seems a strong possibility if Boris Johnson is to be too rash with his decisions. To implement further restrictions is to put people’s income at risk. Reduce a person’s income and all that careful budgeting to meet repayments was for nothing. Missed payments incur fees, leading the value of debt to slowly but steadily increase. Be aware, however, that even when a customer is defaulting on payments and interest on debt is racking up, some buy-now-pay-later companies will allow users to continue making purchases.
Customers can find small relief in knowing, for initial missed payments on soft check options, Klarna will not send any details to Credit Reference Agencies. However, where a customer continues to default on outstanding payments, the case will be passed onto a debt recovery agency. The point at which a debt recovery agency gets involved spells bad news for the consumer’s credit score.
2022 will be a landmark year for the buy-now-pay-later industry as the Financial Conduct Authority will finally introduce regulations. As with all things, however, this will take time. It was back in February 2021 that the UK government announced it was bringing unregulated, interest-free buy-now-pay-later products into regulation, but it was merely a few months ago that the Treasury opened a consultation into what this regulation might look like. For now, the unregulated debt taken on by Christmas shoppers leaves them vulnerable.
Whilst we wait to see what regulation of the buy-now-pay-later sector might look like and what protection this will afford customers, businesses must ask what they can do to help those customers currently struggling with repayments. Uncertainty will only grow as the government shies away from responsibility and leaves us all in the lurch. A harsh form of debt recovery for those who miss repayments will only exacerbate financial woe in an already perilous economy. Debts still need repaying, but they need handling with sensitivity and tact. Showing customers a little empathy can go a long way to cementing trust even when chasing the debt they owe.
Lawton Hathaway has over a decade experience of specialist debt collection, outsourced credit management services and consultancy. Our technology driven recovery processes help maximise customer engagement on various platforms and actively assists better recovery practices. To find out how we can help recover your debt in a sensitive yet efficient manner, visit our website or call us on 0161 441 0850.