Fintech (financial technology) has advanced massively in recent years, with challenger banks popping up everywhere. Revolut now boasts over three million users, while Monzo around the same, and Starling 775,000.
We’re able to send money to our friends with a press of our fingerprint, and buy from our favourite shops without so much as typing in a number.
Finance is changing massively, which is great when it comes to the perks. After all, who doesn’t want lower card fees when travelling and less faff doing your shopping?
When it comes down to the drawbacks, though, they often aren’t noticed until it’s too late.
Take Klarna, for example. This is a buy-now-pay-later service partnered with over 4,000 retailers such as ASOS, Boohoo, JD Sports, and Topshop.
It’s advertised on Instagram with the slogan ‘try before you buy’ and images of fashion-forward models wearing the latest trends. You can have your items delivered as normal but pay for them in 30 days, interest-free. You only pay for what you keep, so if you decide to return things, this amount is taken off your balance.
You can also choose, instead, to ‘Slice it’. In this instance, you’ll again have the items delivered as normal, but this time you’ll pay back the price over a course of up to 12 months. On the Klarna website, they claim that retailers can gain a ‘58% increase in average order value for shoppers using Slice it and 30% higher conversions at checkout by shoppers using Slice it.’
Those who’ve used Klarna will be well aware that there is very little standing between you and the ‘pay later’ service. The company completes a soft search on your credit, which will leave no footprint on your credit score for future lenders, and is done to check you are who you say you are.
Even a quick Twitter search can show that thousands of people are being hit with bills a month after their purchases that they then can’t afford.
From young people calling the service ‘dangerous’ to ‘the devil’, the implication is clear that the ease of use of buy-now-pay-later schemes (and the ubiquity in which you’ll find them on some of the most popular shopping sites) is promoting a culture of impulse buy now, worry later.
The phrasing of the adverts – as an easy-breezy ‘try and buy’ service – couldn’t be further from applying for a bank loan or overdraft, or even the old-school hire purchase of the past. The borrowing is rebranded as just another crutch for our increasingly busy lives, rather than stuffy old credit.
‘Our most popular Klarna service lets shoppers pay 30 days later and is used for flexibility rather than financial reasons, as it allows customers to try before they buy,’ Luke Griffiths, UK MD of Klarna tells Metro.co.uk.
‘Customers have up to 30 days to pay for their goods after they are shipped, with no interest or fees – ever. This means they can return the items if they’re not what they expected, without any money leaving their bank account – and prevents them from having to part with money upfront, or wait for retailers to process a refund.’
As for the Slice it option, it’s not as easy to obtain credit. Your credit file will be subject to a ‘hard search’, which can be detrimental in the future to any other applications – including mortgages – as lenders may deem you ‘credit hungry’.
Klarna isn’t the only company doing this. They’re joined in the industry by the likes of Clearpay, with each service partnering with different brands as an online buy-now-pay-later option. Clearpay offers no credit check, and allow borrowers to split their payment interest-free after providing 25% of the cost upfront (but with late fees for any missed payments rather than a negative stamp on your credit report).
All these websites doing pay monthly schemes like Klarna is so so dangerous. I’m now paying £50 a month for 5 months on a pair of headphones 🥴
— Oisin (@OisinEmmett) October 28, 2019
Payday’s great until you remember all your Klarna payments are due 😩😩
— Alice (@AlicePawson) October 31, 2019
While Klarna and their peers can’t be held responsible for the debt that young people may find themselves in, it’s unsettling to see these offerings advertised to a young market on social media sites; the same young market that grew up scrolling through the Apple terms and conditions and clicking accept without so much of a glance.
‘Many retailers are now offering more flexible finance options with buy now and pay later schemes rapidly growing in popularity, particularly amongst younger consumers,’ says Andrew Johnson, an advice manager at the Money and Pensions Service.
‘Fuelled by the many interest-free options on offer, customers who order extra items to try out particularly like the opportunity to postpone their initial payments until they’ve decided what they’re keeping.
‘The growth in this area is particularly worrying because of how easy it is for borrowers to get credit, which could lead to more debt issues in future if it isn’t properly managed. The lack of detailed affordability checks may result in some borrowers failing to keep up with their repayments, resulting in additional charges and much bigger bills.
‘Failure to keep up with your loan commitment could negatively impact your credit report, your ability to obtain credit in the future and means the possibility of having to deal with debt recovery agencies.’
A report by the Money Advice Trust found that 37% of under-25s in debt had no plan in place to pay back what they owed. The same study found that only 27% of people aged 18 to 25 know what their credit rating is and how it affects them.
While companies may offer transparency and aim to help vulnerable customers, there’s a clear disconnect between the Insta-worthy advertising and the promise of ‘making payday irrelevant’, and the potential negative consequences of falling behind on payments or even simply applying for a loan (even if it’s not explicitly stated it’s a loan).
It’s less about the fact that these lenders (Klarna, by the way, is a registered bank, and websites need a Credit Broker License to offer Slice It loans) exist – after all, they’re not that different from the catalogues our parents swore by for Christmases gone by – and more about the fact that of the millennials borrowing from them, more than one in five say they spend more than 60% of their income the day it enters their account.
Jon Holt, Head of Financial Services at KPMG UK said: ‘With so many young people spending so much of their income on payday it’s little surprise that people are forced to rely on credit to get through the rest of the month, let alone to cover unexpected expenses, like a car breaking down.’
Is it right to be looking to this credit-crunched generation to then be indebting themselves further for the sake of ‘frivolous’ purchases like clothes?
Carl Scheible, Clearpay’s UK CEO, tells Metro.co.uk that, similar to Klarna, their product is about flexibility: ‘We are where our customers are. With the majority of them being Millennial and Gen Z aged, it’s important to offer these digitally native cohorts the ability to engage with us on platforms that make the most sense for their busy lives.
Klarna denies that they specifically look for younger customers with their advertising: ‘We have a large range of retailers within our portfolio and their consumer demographics vary widely,’ claims Griffiths.
‘While it is the retailers’ responsibility to advertise the payment method, it is very important to us that our products are communicated to customers responsibly and accurately. We have guidelines for our merchants and partners to ensure Klarna is communicated in a clear, fair and not misleading manner.’ (NB, these adjectives are direct quote from the FCA guidelines on financial advertising on social media)
Overdrafts are another product that is on the table as soon as you have your first legal pint. Bank staff sit at fresher’s fairs touting student overdrafts of up to £3,000 to bright-eyed teenagers who only managed last year to fit into their ‘you’ll grow into it’ school blazers. It’s a lot of responsibility.
But as banking has changed so has this almost rite-of-passage form of debt.
Challenger banks like the aforementioned Revolut, Monzo, and Starling are the methods du jour for Gen Z and millennial spenders and savers, with the snazzy cards visible in every Pret across the country.
In terms of the lending these banks offer, it differs from company to company. Revolut doesn’t currently offer any forms of credit, while Starling offers overdrafts of up to £5,000 at a rate of 15% EAR and loans with tailored interest rates depending on eligibility and what’s already been borrowed through the overdraft facility.
Monzo instead has a flat fee arranged overdraft. Customers have a £20 buffer, but over and above this, they’re charged 50p per day for any amount.
Because these new banks offer genuinely helpful spending monitors and savings tools, it’s easy to assume that they’re also offering the best rates for consumers.
For a customer to be charged up to £15.50 a month regardless of whether they’re in £30 or £1,000 of debt means that for some, this won’t be a competitive rate at all, and could eat into their cash.
When asked about this, a Monzo spokesperson said: ‘Being transparent and communicating our products clearly is a priority at Monzo. We’ve worked with our customers to find a fee structure that is clear – and we chose the one that they favoured.
‘There is no charge up to £20 and one daily flat fee of 50p over that amount, with no hidden or extra fees. We do not encourage people to rely on their overdrafts and have a dedicated financial difficulties team that has been recognised as the best in the industry for helping people out of financial situations they are struggling to manage’.
They did also share with Metro.co.uk the credit agreement shown to applicants, which addresses the fact that it is a form of credit and can negatively affect your score if not paid back.
Similarly, Carl Scheible of Clearpay says: ‘Customers are empowered to spend flexibly within sensible limits. We help customers avoid debt traps and revolving interest payments. For example there are built in consumer protections which restrict an account from being used if just one payment is missed – essentially turning the credit card model on its head.’
Each of the companies we spoke to were keen to point out that they do have systems in place to help those who fall into crisis. But the problem seems to lie with how easy it feels upon point of application to access extra cash from any of these lenders, and how ‘not-debty’ their UX-designed solutions appear on a screen. And it’s the sort of issue that isn’t easily fixed.
The answers from the challenger banks and new lenders (although Clearpay says that they are not a credit provider) is akin to parents letting their teens drink in the house because at least then they can look after them. If young people are going to be borrowing anyway, then why not do it with them and their flat, transparent fees and friendly on-hand teams?
Just like the exasperated dad having to clean up their 16-year-old’s vomit, though, it’s not quite as simple, and doesn’t address the fact that 71% of young people are worried about money and 83% feel they need dedicated financial lessons in schools. Alison Pask, MD of financial capability and community outreach at The London Institute of Banking & Finance, calls this age group ‘woefully unprepared for life’.
It’s easy to spend and leave the repayments as a problem for a later version of yourself. Shopping around or sleeping on the decision is harder when you have a push notification or a big logo right there offering you an easier solution.
Much of the temptation to overspend can be rationalised by a combination of phenomena like social media FOMO and the sense of hopelessness that comes from soundbites like ‘baby boomers were 50% more likely to own a home by the time they were 30 compared to millennials today’.
What needs to be drummed into young people is that there is no form of debt that comes without possible repercussions. Regardless of whether it’s an influencer or an elderly lady behind a till selling you a loan – and whether you’re being called dude or dearie – the terms and conditions are there to be read and understood, not cast aside in favour of impulse spending.
For those who are relying on credit to get by day-to-day, or those who are struggling with debt, asking for help is the next step. Contact the Money Advice Service if you’d like free, impartial debt advice.
Debt Month
This article is part of a month-long focus in November all about debt.
Scary word, we know, but we're hoping if we tackle this head on we'll be able to reduce the shame around money struggles and help everyone improve their understanding of their finances.
Throughout November we'll be publishing first-person accounts of debt, features, advice, and explainers. You can read everything from the month on the Debt Month tag.
If you have a story to share, a topic you want us to cover, or a question that needs answering, get in touch at MetroLifestyleTeam@Metro.co.uk.
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source https://metro.co.uk/2019/11/02/damaging-repackaging-debt-challenger-banks-buy-now-pay-later-10978215/
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