BUY NOW, PAY later services are making their way to Ireland, but experts warn that customers should be fully informed about their potential effect on credit ratings and finances. 

Previously, the market for buy now, pay later services (also known as ‘after pay’) has been limited to larger products such as furniture, and had been primarily offered for customers looking to pay off the cost of their purchases over a number of months with interest added.

However, in recent years a number of companies have emerged that offer online shoppers the ability to spread the cost of purchases over a set period of time. One of those companies, Klarna, is preparing to open operations in Ireland.

You might have spotted providers like Klarna on retail sites, where they offer consumers the chance to split payments for their online orders into three installments which are spread over three 30-day periods. This option can often make online shopping seem cheaper or more affordable to customers despite items costing the same price.

Klarna even offers a financing credit option, where people can spread the cost of a purchase over 6 – 36 months. On its UK website, Klarna says users can download its app to “get daily inspiration” and “experience a better way to shop”.

But could such after pay services lead to financial implications for shoppers, particularly those who haven’t read the fine print?

Clarity

Speaking to The Journal, money expert and founder of the financial literacy podcast Pennies to Pounds Kia Commodore noted that the services can be used in a manageable way. “Buy now, pay later I think is actually great if you use it properly and pay on time,” she said.

However, she pointed out that there are concerns around clarity with these types of service, in part due to a potential lack of financial knowledge on the consumer’s part, but also a possible lack of transparency by companies.

“Buy now, pay later is not as clear as it should be. So I feel like it can lead to a lot of people, especially young people, getting into debt. A lot of people don’t realize that what they are taking out is actually another form of credit.”

Using these services is a credit agreement between the consumer and the company, yet sometimes this may not be clear to those who use after pay sites to purchase their orders, cautioned Commodore.

Klarna is not the only buy now, pay later business with plans to land on Irish shores.  For the first time, Apple is offering consumers the option to pay in installments and the company AfterPay looks set to expand in Europe having just been bought by Square.

The buy now, pay later market has grown rapidly as more people turned to online shopping during the Covid-19 pandemic. These companies have captured the consumer demand for purchasing products in an instant.

However, like many credit products, there are concerns about the risks and penalties involved. Worries have also emerged about the financial vulnerability of people who use buy now, pay later products. Buy now, pay later companies such as Klarna, Clearpay and LayBuy do put limits on the amount of money you can spend and are only available to those over the age of 18.

However, these companies also fall outside of the regulatory remit of the Irish Central Bank.

In its Q&A on Klarna, Asos warns users:

Asos Asos

Speaking to The Journal, Muriel Dolan, Deputy Communications Director at Competition and Consumer Protection Commission, noted concerns surrounding these services: “It is so important that consumers know that buy now, pay later is a form of credit. So they are actually entering into a credit agreement.”

Credit agreements can impact the credit score of consumers if they miss a payment. If this occurs, not only will the credit score of the consumer be impacted, but they may also face additional charges depending on which company they have a credit agreement with.

Late payments may also result in users having to pay additional charges and penalties. This varies from company to company – for example, at Clearpay if you miss a payment on an order valued at £24 or above, the total of the late fees that may be applied are capped at 25% of the original order value or £36, whichever is less.

If using the pay in 30 days service with Klarna, if the debt remains unpaid after several months despite multiple payment reminders being sent, the account will be classed as in arrears and then passed to a debt collection agency. Klarna’s financing service has an APR interest rate of up to 18.9%.

Such missed payments can also have an impact on your future financial choices as Dolan pointed out, “overdue payments might have repercussions down the line when you are trying to get a loan in the future because now it will appear that you missed payments on a credit agreement”.

Despite the efficacy of the services when payments are made on time, concerns remain regarding the lack of regulation in this area. “Buy now, pay later as a service in itself isn’t bad, but where there’s a lack of regulation in the space, it can lead to these different issues,” Commodore said.

The UK is set to establish laws regarding credit products later this year in order to help the Financial Conduct Authority better regulate buy now, pay later firms. Commodore stated that Klarna has taken steps to work with the regulator and increase transparency, citing this as “a good shift in the right direction”.

Regulation

Back in Ireland, buy now, pay later companies are not currently regulated. However, the Consumer Protection (Regulation of Retail Credit and Credit Servicing Firms) Bill 2021 is set to change this. The bill is in its second stage before the Dáil and will provide regulation to credit services.

Speaking to The Journal, Karl Cronin Manager of the North Connacht & Ulster branch of the Money Advice and Budgeting Service (MABS) highlighted the importance of the legislation.

“These types of legislation are really for the benefit of the consumer at the end of the day, so anything that is more transparent and gives more information to the consumers who are using these types of credit, there’s always going to be a benefit for them.”

This was reiterated by Dolan who said: “It is really important that these come under the Central Bank regulation because we have seen they are growing in popularity.”

A spokesperson for the Department of Finance said the bill “was initiated in Dáil Éireann prior to the summer recess and the second stage of the Bill is expected to finish early in the autumn”.

“As indicated by the Minister of State when moving the Bill will, inter alia, ‘require providers of indirect credit to consumers to become entities regulated by the Central Bank. Indirect credit, which has become much more available in recent years, is so-called because the lender provides credit to the borrower by paying a retailer for the purchase of a good, often as part of a buy now and pay later offer’.”

The implementation of regulations on buy now, pay later companies comes as their services tend to be targeted at younger adults buying items like clothing and beauty products.

In the past, buy now, pay later and other forms of in-store credit would have been used mostly for larger expenses such as electronics and white goods. However, this has changed dramatically and many young people are using the services to ensure items are delivered to them the next day without having to pay the full amount upfront.

It is therefore important that consumers know the full details of the credit agreement they are entering. Cronin points out, “there is a place for buy now, pay later as a source of credit and it does work for some people”.

However, consumers should be aware of what can happen if they miss a payment. Interest rates and penalties vary from provider to provider. Some companies can take legal action against the consumer to recover the debt if it goes unpaid for a period of time.

As the buy now, pay later market looks set to grow in Ireland, adequate financial knowledge in conjunction with up-to-date regulation for credit products and agreements remains more important than ever.