‘Buy now, pay later’ challenges sustainable funds

I am not really an online shopper. But in the grip of lockdown boredom, even I found myself walking down a virtual main street just for something to do.

Seconds after I landed on the homepage of a furniture retailer, I walked past a banner ad “0% APR Four Year Interest Free Credit”. It wasn’t a trick to get me to sign up for an in-store credit card, but rather the offer of a one-time, direct deal with the retailer that would allow me to finance a sofa over the next four years in installments. the size of a peanut, apparently at no overall additional cost if I respect the payment deadlines.

These types of products are known as “buy now, pay later” (BNPL) programs and have taken over the online shopping world in recent years. As the companies that operate them grow and prosper, they may attract more interest from investors.

Indeed, established names like PayPal also offer BNPL services. This means that funds like Liontrust’s Sustainable Future Global Growth ended up with some (albeit low) exposure. More on that later.

Buy now, pay later

Swedish supplier to BNPL, Klarna, claimed to have partnered with a new retailer every eight minutes in 2019 – more than 60,000 retailers in one year – bringing its total number of partnerships to more than 190,000 stores. Although Klarna is yet to be listed, rumors circulated online earlier this year about the prospect of an IPO in the near future. Meanwhile, Australian provider BNPL AfterPay launched in 2016. It has since bought out British rival ClearPay and has more than two million active customers.

Klarna’s two largest BNPL products, “Pay 30 Days Later” and “Installments”, are offered at a 0% interest rate, as is the case with most BNPL products from other providers. .

This raises some first questions about the profitability of these companies. But Alex Marsh, senior director of analytics at Klarna UK, insists Klarna does not benefit from customer defaults, but profits from retailers paying for their customers to use its service.

“There will be circumstances where a customer misses a payment, but we send out notifications that a payment is due,” he said. “We make sure that the consumer is aware of the upcoming payment and we make it very easy for them to reimburse us. “

According to a statement on Klarna’s website, her BNPL products have “no interest or fees, ever” and to apply to use the products she only performs a “soft search” which has no impact on the customer’s credit rating.

It may all sound too good to be true. But after combing through the fine print of several of these plans, the only requirement seems to be that you be able to pay a monthly payment by the agreed due date. However, failure to do so can lead to consequences, such as transferring to a debt collection agency.

Lack of regulation

These products are also currently slipping through the cracks of UK financial regulation, meaning providers are not required to spell out the nature of what they are offering consumers or highlight potential risks. This means that users may not fully appreciate the nature of the programs and the implications of not meeting payment deadlines.

‘Most Used Klarna UK [products] are exempt from a regulatory perspective, where consumers do not enter into a regulated credit agreement with Klarna, ”Klarna’s website says.

To some, the implications of paying on credit may seem obvious. But others may not understand it – and with no regulations to follow, these regimes have no obligation to explain themselves.

This is all the more concerning as these programs have been heavily promoted on social media in recent years, with some influencers using their platforms to promote the product to their – often young – followers as a positive way to manage their finances.

Financial activist Alice Tapper, who started the personal finance hub Go Fund Yourself, wants BNPL products to fall under the jurisdiction of the FCA.

While these programs can be appreciated by customers, she said the lack of regulation around them is “concerning” as there are “few risk formulation requirements, both at the time of payment. and in advertisements ”.

“To be clear, these products absolutely have value for some consumers,” she said.

“My concern is the lack of regulation especially regarding unregulated BNPL products, as they are a loophole in the consumer credit law, which contains an exemption clause that dates back to the 1970s.

“We are now in a time when technology has come so far, credit itself is available on demand, and regulators have not caught up.

“The consequences of this are that there are few requirements for mentioning risks both at checkout and in advertisements, which you would expect when taking out a credit card, for example. example.

“This means that consumers, who may have been heavily promoted by these products, may in fact be unaware of their nature – for example, that they might find themselves in the hands of a debt collection agency. ”

The Advertising Standards Authority (ASA) guidelines for promoting payday loans state that any advertising for payday loan providers should ensure that the tone does not trivialize taking out a loan.

“If you look at the ASA’s payday loan guidelines on how payday loans should be advertised safely – for example, not to normalize debt – and then compare them to BNPL ads and compare to those standards, nine times out of 10 they don’t. meet them, ”Tapper said.

Harjit Moore, co-founder of debt management app Freeze Debt, added that since some BNPL programs do not fall under FCA regulations, there is “no obligation” to include certain information. at checkout or in advertisements and people might sign up “without even realizing it.” ‘.

“In my opinion, BNPL’s programs risk encouraging ‘bad debts,’ said Moore. “They can be risky in that they invite people to spend money they don’t yet have.”

When main streets closed and workers were put on leave, many consumers turned to online shopping. The Office for National Statistics (ONS) reported that a third of all purchase transactions were made online in May 2020, up from less than 20% in 2019. Meanwhile, more than 50% of seniors ages 22 to 29 have no savings, according to the ONS.

“During the month of July – the last month the leave remained free for employers – organic downloads of the Freeze Debt app increased by 364%,” Moore said.

“Of course, it doesn’t just depend on BNPL programs, but it shows how many people can struggle to manage their finances in these difficult times and how dangerous these programs can be for people who may be financially vulnerable.”

Marsh said that Klarna UK has launched a number of initiatives to help educate clients on how to manage their finances, including an initiative called Mindful Money. This includes blog posts that explain, for example, physical and physical credit checks and the implications this can have on a person’s credit rating.

“One thing to be clear about our demographics is that our merchant base has grown beyond just fashion and the age range of our consumer range is wide – the average is 33 years old. “, he added. “We’re not just targeting the ‘millennials’ group. “

A sustainable investment?

In order to compete with the rapidly growing unregulated BNPL providers, some of the larger traditional payment providers, such as PayPal, have also started promoting their own BNPL products.

One such product is PayPal credit. It works like a credit card, attaching a credit limit to a customer’s normal PayPal account. For every transaction over £ 99, the product allows customers to pay the balance four months later at 0% interest. Any balance remaining after the due date is billed at a rate of 19.9% ​​APR.

The £ 760.4million Liontrust Sustainable Future Global Growth fund, managed by Simon Clements, Peter Michaelis and Chris Foster, holds PayPal as its main holding. The fund has generated a return of 61.7% over the past three years (until June 30, 2020).

The fund aims to identify ‘key structural growth trends’ that will ‘shape the global economy of the future’. He then invests in “well-managed” companies whose products and operations capitalize on these changes.

“We love PayPal because the vast majority and revenue comes from its shift to digital payments and we believe it makes it safer for people to buy online and safer for merchants and small businesses to sell online. “said Foster.

He added that PayPal credit is only about 2% of PayPal’s total revenue, and as a percentage, he doesn’t expect this to increase in the near future.

“As a consumer, this may seem surprising – even though I have received numerous emails from PayPal telling me that I am entitled to PayPal credit. But it is certainly not a pure BNPL company.

“Our point of view is that BNPL and credit generally isn’t a hugely positive thing in society, so you won’t see us investing in a pure credit company.

“We wondered whether BNPL’s business models are a sustainable investment or not. They claim they’re trying to encourage people to learn how to spend responsibly, budget, and pay back – they don’t let you get into a credit card spiral, they cut you off.

“We’re really not at all interested in credit cards because we think the world doesn’t need more of this kind of behavior.

“We looked at a publicly traded BNPL company, AfterPay, based in Australia, but we just couldn’t find a solution and decided not to invest. It just wasn’t clear whether or not there was a durability benefit.

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