Buy Now, Pay Later (BNPL) services are becoming increasingly popular across the globe.
The BNPL market is valued at around £2.7 billion in the United Kingdom.
Although postponing payments might appear to be useful for security and in many instances provides other benefits depending on the service provider and account, credit is always a significant risk and is one of the primary sources of debt, globally.
Last month, the Financial Services Bill received Royal Assent in the United Kingdom. It aims to protect people who may use a range of financial services, by bringing interest-free BNPL products into regulation, while making cash more cash more accessible (by making it more convenient for retailers to provide cashback without a purchase).
As mentioned in an update shared with Crowdfund Insider, it has been announced for the first time in February 2021 that the Financial Conduct Authority (FCA) will be regulating the BNPL sector, after the release of “The Woolard Review” which carefully examined the unsecured credit space.
Serious concerns in the Buy Now Pay Later sector were raised after Capital One blocked these types of credit card transactions in December 2020.
Due to these changes, BNPL platforms will now be subject to FCA guidelines, which means that clients using their services will receive “some extra protections.” For instance, they’ll have to meet additional requirements to ensure that consumers are able to afford to use their payment plans.
As explained in the update, these rules aim to minimize the chances of customers taking on too much debt – which they may not be able to pay off in the long term.
A recent study by NerdWallet has looked into the Terms and Conditions and Privacy Policies of some of the “most popular” BNPL firms, in order to determine or estimate how long they’d take an “average person” to understand.
As noted in the update, NerdWallet spoke to industry professionals in order to “highlight the risks of such apps that users must be aware of to ensure they are using these responsibly and safely.”
The report from NerdWallet pointed out that the “average reading rate for a native English speaker is 238 words per minute.” They explained that “using the number of words in each T&Cs document, the average time-to-read these documents across the 11 services totals over a staggering 36 minutes.”
But’s it’s important to “consider the clarity of these documents, which may lead to additional reading times and in this study scored just 60% on average,” the report noted while adding that with these types of apps being quite popular among young consumers, it’s important the T&C’s are “written in a consumer-friendly way.” By looking at the clarity, the study by NerdWallet tried to determine how easy (or difficult) it can be to truly understand the sentences.
The NerdWallet team has shared their full analysis of each apps Ts & Cs and privacy policy. They found that Klarna‘s Ts &Cs were 13,637 words long, took around 57.3 minutes to read, and received a clarity score of 48%.
They also found that Zilch‘s Ts &Cs were 11,364 words long, took around 47.7 minutes to read, and received a clarity score of 54%. (Note: you can view the complete table and more details here.)
John Ellmore, Operations Director at NerdWallet, stated:
“With the length and complexity of terms and privacy notices, we shouldn’t be surprised if many people click accept without reading or understanding exactly what they’ve agreed to. This may not cause problems for most people, but there is a risk that a customer could agree to something they weren’t aware of if the crucial piece of information was buried in a mass of text.
Ellmore added:
“Especially as Buy Now, Pay Later schemes grow in popularity, it’s important that providers try to make their terms and privacy policies more concise and easier to read. The fact that some providers, like Klarna, have double the number of words in their terms and privacy policies than other providers, shows that a lot more can be done to make these documents more readable and consumer-friendly. Improving the accessibility of the documents could encourage people to read them in full, helping them to better understand their rights and feel more confident about the service they are using.”
Klarna topped the list with the longest policy document to read, the report revealed.
Klarna is now one the most popular BNPL services, with many retailers providing this type of payment option. However, Klarna also came out on top for “the longest T&C’s, taking over a staggering 57 minutes, if not longer, with a clarity score of only 48%.”
The update further noted:
“To put the length of these documents in context of how you could be spending your time otherwise, you could fit an episode of The Crown into the same time, or at least 2.5 episodes of popular sitcoms and animated shows like Rick and Morty, The Simpsons, or Friends.”
Although some BNPL purchases will not get registered on your credit report if you make timely repayments, “any late or missing payments could potentially damage your score,” the NerdWallet team clarified.
They further noted that BNPL purchases may “affect your eligibility later on when you’re applying for credit, such as a personal loan, mortgage or credit card.”
The report also mentioned that there’s a real risk that BNPL schemes could attract consumers who’re already experiencing financial hardship and may be struggling to pay off their existing bills and payments.
So when you add the extra cost of BNPL services, it might “worsen the situation by putting them in further debt,” and this could “have long-term implications, financially to debt and mental health.”
It should be the customer’s responsibility to carefully read the fine print and make sure they completely understand the terms of the BNPL agreement they’re planning to use. The customer may also want to factor in the possibility of a change in their financial status in the foreseeable future.
The lender or retailer needs to maintain appropriate standards of credit underwriting and modelling and clearly communicate all the details of their offer in a straightforward manner.