Banks to crack down on ‘buy now, pay later’ over customers’ hidden debts

DEBT

Banks are contemplating action to deter customers from using “buy now, pay later” when online shopping, over concerns that it is more difficult to see when customers have substantial debts.

Buy now, pay later providers such as Klarna allow shoppers to buy items without spending a penny and repay the debts over months.

Millions of people have used the controversial services and this Christmas is expected to be the biggest ever for online shopping. However, there is growing concern among banks that the easy shopping loans may be encouraging people to spend beyond their means. Customers have been unable to repay loans or overdrafts and have been charged penalty fees by lenders.

A senior executive at a major British bank said many customers in financial difficulty were later found to have huge buy now, pay later debts that the bank did not know about. Banks fear that the sector is causing spending to spiral out of control. Debts racked up using buy now, pay later are not logged by credit referencing agencies and banks cannot automatically see how many loans customers have taken out.

“We are seeing lots of problems,” the

executive added. “This is an unregulated sector and consumers have little protection. We urgently need a way of seeing how much debt customers have.”

Klarna, the biggest operator in Britain, said it was working with credit referencing agencies to make debts more visible and had called for more scrutiny of the entire sector. Klarna had previously said it did not need to be regulated, but has now told Telegraph Money that it would welcome greater supervision. Rival firm Clearpay is also backing further regulation.

The industry in Britain is awaiting a review by the Financial Conduct Authority, the City watchdog, on whether it will become regulated. A decision is expected in early 2021. Alex Marsh, head of Klarna in Britain, said the firm wanted to increase standards and took aim at rival providers that charged huge fees when customers missed payments. He called for a complaints body to be established.

The backlash against the buy now, pay later boom has gathered momentum. Capital One, one of the world’s biggest credit card providers, has blocked users in America and Canada from using its cards for buy now, pay later. The firm’s British arm said it “continues to review” its policies.

Anthony Morrow of OpenMoney, a financial analyst, said: “We are seeing a shift in attitude towards buy now, pay later. These services are rightly under scrutiny and it wouldn’t surprise me if more banks followed suit.”

UK Finance, the banking trade body, said banning transactions was a decision for each bank.

Banks are worried that carefree spending is raising levels of hidden debt