Money Box Live: Buy Now, Pay Later Shake-Up

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1:05Visit schwab.com to learn more. Hello, this Moneybox Live podcast is dedicated to the major rule changes to buy now, pay later, coming in today. For years, this kind of borrowing has felt frictionless, free, and even fun. Breaking purchases like clothes, furniture, or even smaller stuff like makeup down into bite-sized monthly mouthfuls. And it has exploded in popularity. Experian estimates that 100 million transactions were made that way last year, adding up to about£7 billion. I even use it sometimes on takeaways or food shopping because it's just so accessible. From today, services like Klarna, PayPal and Clearpay will have to follow new rules, which give consumers more protection, but also a greater risk of rejection as new affordability checks kick in.

1:57In this Moneybox Live, we're going to look at how buy now pay later works and what happens when it doesn't. And we'll talk to the Financial Conduct Authority to ask them why they think these new rules are going to improve things for shoppers. Now, we'll hear from some shoppers in just a moment. But first of all, let's find out what changes today with our experts. I'm joined by Mick McAteer, who used to be on the board of the Financial Conduct Authority and is now co-director of the Financial Inclusion Centre. And Matt Sheeran from Money Wellness, a free debt advisor, a debt advice provider provided by the money, funded by the Money and Pension Service.

2:33Hello. Hi, good morning. Good afternoon indeed. Good to have you both with us. Matt, can you start? Can you just explain how Buy Now, Pay Later works and what's actually changing today? Yeah, so very simply, Buy Now, Pay Later is a form of borrowing that essentially allows you to pay for goods or services immediately or purchase goods or services immediately, but actually make those payments in the future. That can take two different forms. So you can make instalments, whether it's weekly, fortnightly or monthly, or you can make that one-off payment further into the future. Now, in terms of what's changing, buy now, pay later lenders are now under FCA regulation, which very simply put is going to protect consumers.

3:10It's going to give them more protections and ensure that there's affordability checks in place. So there's affordability checks. I think you can complain now to the Financial Ombudsman Service. So there's sort of additional consumer protections alongside those stricter checks. Absolutely. So as well as the affordability checks that are really important, there's going to be a much clearer information about the agreement that you're entering into. It's going to tell you exactly how much it is, when those payments need to be made, and importantly, what happens if you don't make those payments. But equally as importantly, it's going to give you more support.

3:40So once you, on the rare occasion, you aren't able to make payments, they're going to be able to support you with referrals and signposting to things like free debt advice. Thank you. And Mick, there'll also be extra protections for purchases, won't there, like people have at the moment with credit card spending? That's right, yeah. One of the really good things about the new regulations, bringing these third-party lenders within the FCA regulation, is that people will now get the same Section 75 protections that they get with credit cards. And that is a really, really valuable protection that users of Buy Now Pay Later were missing out in the past.

4:13but it's really important to recognise that this only applies to the third-party lenders like Klarna. Lenders that, you know, retailers, big retailers that have their own buy now, pay later products and if you buy a product from them using their buy now, pay later product you won't get the same protection as you do buying through a third-party provider of buy now, pay later. And we'll talk more about that later on in the programme. But Matt, what will immediately feel different at the till or the online checkout? Yeah, so there'll be a few things that you see immediately that you haven't seen prior to today.

4:43So the first is you'll be notified about the affordability check, whether that's a soft check or a hard check. You'll notice that straight away. When it comes to actually agreeing to take out the product, you're also going to get that clear information displayed right in front of you. So you're going to have that information so you can make an informed decision before taking out the product. And Mick, you actually, you gave evidence to MPs about this. What were your concerns about how the market was working before these new rules came in? Yeah, thanks. That's the really, really important question.

5:12At the Inclusion Centre, we follow the principle that harm follows the money. What that means is if you see a financial product that grows very quickly, then there's a very good chance you will see significant consumer harm accompanying the growth in that market. And the buy-now-pay-later market has just exploded. Back in 2017, the market was worth around£16 million. pounds. By 2024, it was worth£13 billion. So we saw a real explosion there in the use of buy now, pay later. 11 million adults use buy now, pay later. Not surprisingly, we saw a range of harms emerging. For example, we saw credit being given to people who really couldn't afford to use that credit.

5:54So rather than help them, it was actually worsening their financial vulnerability. And you can see that from the data that the FCA has, that buy now pay later users are twice as likely to show signs of financial distress compared to non-users including in being in rears. They're more likely to be in places in the most economically deprived areas of the UK twice as likely compared to people who live in the least deprived areas and in those deprived areas what you also see is the highest use of unsecured credit and data from the registry trust shows that in those areas as well that's where you see the highest level of county court judgments.

6:32So there was a real concern that the way credit was too easy was aggressively sold, was worsening the position of already financially vulnerable consumers. But I think it's also, if I could just add, one of the other things I think was sort of less well recognised is that it wasn't just being sold to financially vulnerable consumers. The way the firms operate, they are incredibly efficient and clever at exploiting psychological biases and weaknesses, which meant that it was very, very good at encouraging what they call impulse buying. And if you look at the data as well, a significant number of consumers actually end up regretting the purchases that they make through buy now, pay later.

7:10I mean, it's absolutely important to look at the vulnerabilities and the situations people come to harm. But I think it's also important to recognise that quite a lot of people just use this product on a day-to-day basis as a way of kind of not paying interest and spreading the cost of their purchase. And I have been out actually to find out how people use Buy Now, Pay Later and if they know about the changes coming to the rules today. I've been stopping customers on their way to a shopping centre in Manchester to ask them if they use it and if they know the rules are changing. So I'm just asking people about Buy Now, Pay Later.

7:43Is that a product that you use? Yeah, I used to. I don't anymore. Why did you stop? Because I got myself into a bit of a rut and was getting everything Buy Now, Pay Later. So I come to payday and then I'd skip myself and I have to constantly use it. so I had to put myself in a van. So have you paid it all off now? Yes, but I will not use it again though. Did you know that the rules are changing from Wednesday? No, I actually didn't. What are the new rules? So there'll be more protections for people. You'll be able to complain to the Financial Ombudsman Service. There'll be stricter affordability checks.

8:11You'll get some of the same credit card protections. Okay, yeah, that's great. Yeah, because I think when I was younger, there's definitely times I did it when I shouldn't have been almost allowed to. So yeah, I think that's great that it's changing. I've just never been tempted. I don't like the idea of buying things I can't afford. And do you think that's what people do with Buy Now, Pay Later? I've got lots of friends that consider it free money and think about it as something they buy down the line. So, yeah. I have used it before, yeah, definitely. Why did you use it? What were the benefits?

8:38It just kind of felt like I was putting off a bigger expense and worry about that another day. Is it something that you'd use in the future? Yeah, potentially, but I'd probably be a bit more mindful about it now. I probably just wouldn't be using it for everything like I did when I was a bit younger. But do you think some of the benefits, like the fact you don't have to pay interest, those are more helpful than maybe a credit card? Oh yeah, 100%, especially on bigger things like furniture and things like that, like the really big expenses. So yeah, I do think there's some good in it, it's just not getting too caught up in it.

9:03So do you use buy now, pay later? I don't know what a friend has recently. She bought a TV and she's got nine months to pay it up. And do you think that's a handy way to do it? It is a good idea, yeah, for some people. So it means that more astringent checks, I think that's a good idea, yeah, because I think people borrow more than they can pay back and get them into financial debt and financial troubles as well. So, Matt, people there with a lot of different experiences, some people who are using it, some people who are intentionally not using it, and some people who found that they had indeed struggled with their buy now, pay later debt.

9:35You've mixed touch on it, but you've seen it at Money Wellness as well, haven't you? Definitely. It's really interesting hearing some of those comments. So when we look back a couple of years ago, a lot of customers that were coming to us for debt advice, they'd taken out buy now, pay later, but it was for bigger purchases and they were splitting that up into more affordable monthly payments. But what we're seeing more and more is we're seeing customers that have more Buy Now Pay Later accounts for lesser amounts. So it's more a demographic of people that are using it for essentials that they can't always afford.

10:03And that's where the harm's really coming in at the moment. It's an important question, though, isn't it? Is it that Buy Now Pay Later is causing those problems? Or is it that Buy Now Pay Later is more available and people with problem debt are using it? I'd say it's partly the latter. So it is more and more available. It's more and more in your face. It's something that you see day in, day out. And I think when you are making lots of small payments under Buy Now, Pay Later, it's very easy to get lost. And before you know it, there's a mountain of smaller debts that you're not actually then able to repay next month.

10:33And that's where it can sometimes be harmful. OK, well, let's hear from Paul now in Belfast. He is nearly 70 and retired. He started to use Buy Now, Pay Later when money got tight. And he worries that the new affordability checks that are coming in might stop people borrowing who really need it. For quite a while now, because of the cost of living and because of my rent going up, because my state pension is not enough to cover my costs, I was having to choose whether to put food on the table or pay my bills. It was great for a while. And then, of course, things started to go wrong. With a particular company, it had gone up to almost£1 ,000.

11:15It's almost like a drug because it gives you a false sense of security. I was having anxiety attacks and wondering what to do next. The problem is that if you take away the buy now, pay later option, you're going to be taking away something from people that they cannot do without. So sort something out which is practicable rather than deprive people of beating their families. Well, thank you, Paul, for speaking to us. And I should add, of course, that if you're affected by debt and its potential impact on mental health, There are details of organisations offering information and support. Go to bbc.co.uk forward slash action line.

11:56Mick, what do you think of Paul's point that if money is tight, this can feel like a solution? Yeah, that's a really, really interesting point. And there's a really big debate about that going on around the consumer organisations at the moment. The attitude we would take at the Inclusion Centre really is that you're not helping people that are already in financial difficulty by giving them access to easy credit, which ends up making their financial position worse. You're not doing anybody any favours by doing that. And I think, interestingly, what the FCA's new rules intend to do, what they certainly don't want to happen, is for people who can afford to repay buy now, pay later, and who can use buy now, pay later in an effective way, there is no intention of denying people access to credit that can be useful for them.

12:44And it is a bit worrying that there is this kind of thing going around at the moment that regulation and consumer protection has caused financial exclusion and driven people into the hands of loan sharks and whatever. I mean, are you worried that this change in checks could push people towards unsafe debts? Our experience actually is that far from this kind of lending acting as a protection against illegal loan sharks, what happens in the same with payday lenders. the payday lending and the buy now, pay later kind of acts as a conveyor belt towards illegal loan sharks. So you might have someone who's in financial difficulty who ends up borrowing more than they should have been given credit.

13:23That makes their financial position worse. They more quickly run out of options and they more quickly end up into the hands of the illegal loan sharks. It sort of snowballs. It snowballs, exactly. So I'm very, very concerned to sort of try and jump on this argument that's going around that good regulation causes exclusion and drives people in the hand of loan sharks, because that's not the case. Matt, if people like Paul are stuck because they can't get this kind of debt now as a result of the rule changes, what should they do? Where can they turn for help? Yeah, so I agree that the next step isn't to look at additional forms of lending.

13:56The next step is to look for help. So there's a number of free debt advice organisations out there, like Money Wellness, that can ultimately give you that support, whether it's looking at things like maximising your income or how to tackle any debts that you've got. Thank you. It's also just worth acknowledging, I think, that the Buy Now, Pay Later providers themselves seem to be pretty united in welcoming the changes. A Klarna spokesperson told us it had been calling for regulation since 2020 and that it welcomes the changes because it gives consumers added confidence. And a spokesperson for ClearPay said they welcome the new regulations because it will give clear standards for all providers.

14:32OK, that's what the shoppers and the companies say. Let's hear from the regulator next. Earlier today, I spoke to Cherie Howard. She is an executive director at the Financial Conduct Authority, which has brought in these new rules. She's in Merseyside today talking to consumer groups about the changes. Today's a very big day where we've brought buy now, pay later regulation into force such that firms are subject to our rules and the consumer duty to give appropriate proportionate protections to consumers who want and need to access this product. It is a very big day. Why has it taken so long to regulate this area?

15:08Because I remember reading a report from Citizens Advice back in 2021 called Buy Now, Payne Later, that warned then that 41 % of people who used it had struggled to make at least one repayment. Have you failed to keep up with the changing market? What I would say to that is that government gave us the powers to regulate this area a year ago and we have moved at pace to put the right rules in place to make sure that they're proportionate and we give appropriate protections to consumers who wish our need to access this product. So we have moved at pace to get the rules in place. A lot of people will be wondering how you're going to monitor this and what you'll do if you find a provider isn't doing those proper checks.

15:51So bringing these firms into regulation means that they have to go through our authorisations process where we'll make sure that they meet the requirements to be authorised to provide this product. And obviously then they'll be subject to supervision. We have a range of powers, we'll get appropriate data, we'll, you know, at appropriate points do checks on firms to make sure that they absolutely are doing the right things. As part of that, we monitor, for example, complaints. So as part of this regulation, consumers get the rights to go to complain to the firm, but also get access to the financial ombudsman and we'll be tracking that data for example.

16:29If we see levels of complaint, if we see that we'll intervene, if we see high levels of unsustainable debt, we'll be intervening because clearly that's the reason we're bringing this regulation into force today is to make sure that people are subject to appropriate protection through using this product but also have access to this product. So just a lot more scrutiny all round. Yes, absolutely. I want to put to you, though, some of the concerns some people have about these changes, whether they've even actually gone too far. So Fair For All Finance, which is a not-for-profit company, it works to boost financial inclusion, it says almost half of the people who are likely to be rejected under the new affordability rules are people who've never missed a buy now, pay later payment.

17:15Is there a risk, as they say, that this change pushes them towards unsafe debt like loan sharks? So we are very conscious that Buy Now Pay Later is used by millions of customers in the UK and we're very committed to seeing a sector and a product that thrives because of how consumers use it and need it to support their, smooth their cash flow and smooth the cost of making purchases. But we are equally conscious that there are stories of people taking out multiple, and there are absolute examples of people taking out multiple loans and therefore being unable to repay them, getting increased charges and getting into unsustainable debt that they can't repay and having long-term harm.

18:02So we have today issued proportionate regulation which aims to give consumers clearer information up front, being subject to appropriate sensible affordable affordability checks to make sure that they can repay. Also getting the right support if they do fall into financial difficulty, you know, they must contact their lenders, are required to give them appropriate forbearance, but also signpost them to free debt advice. And as I've already mentioned, the ability to access the financial ombudsman if they don't believe that their lender is treating them appropriately. But that's of course only going to be the case for people who are able to access this product, the people who are rejected, there's no additional safety net for them?

18:47We absolutely want to make sure that the buy now pay later sector continues to thrive and is accessible to the millions of consumers who use it every day going forward. But we also want to ensure that people do not get into unsustainable debt rack up increased charges and have long-term harm as a result of being given unaffordable credit. Okay, well, having asked if it's gone too far, I'm now going to ask if it's not gone far enough, because today's rule change does only apply to third-party companies that provide this kind of credit, so businesses like Klarna, like Clearpay. The Financial Inclusion Centre, it's worried that leaves a gap for retailers who are offering their own credit, which is on the rise.

19:34and it says we could end up with two-tier consumer protection and competitive distortions. It wants the FCA to pressure the government to reconsider. Will you? Well, obviously, we have implemented the rules at pace following being given the powers to implement. And we have implemented the rules where we have been given powers by government. We are focused on ensuring that where we have put those rules in place, firms are following, will follow those rules and give appropriate support and protection to consumers.

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21:12So Cherie Howard there from the FCA. A few of you getting in touch to say very, very similar things. Somebody who doesn't give their name has texted to say, if you can't afford to pay for a takeaway when you order it, you can't afford a takeaway. That is definitely living beyond your means. And Anastasia has emailed, Don't get into that in the first place. If one hasn't got the money, they should go without. You can keep sharing your thoughts, moneybox at bbc.co.uk. Sheree Howard there was talking, though, about greater protection for consumers. So let's hear from some people who struggled with this kind of debt before today.

21:47This is Chloe from Bristol explaining how she was able to use Buy Now, Pay Later, even while under a debt management plan. I buy a lot of clothes, makeup, skincare. I even use it sometimes on takeaways or food shopping because it's just so accessible. What attracted me to it was the fact that I didn't have to pay for the item at the time. The worst amount I had on it was probably like£1 ,300, which is absolutely crazy. And that was just on one buy now, pay later account. Even at the moment, I've got£400 on there. And I shouldn't even be using it because I'm in a debt management plan. So with the new regulations coming in, it would mean that people like me who are in a plan to get out of debt wouldn't be able to use Buy Now Pay Later.

22:32I do think that it is a good thing for some people, but for people like me who have problems with spending, it can definitely be really dangerous. I never thought that I'd be able to get out of debt. So now being in a position where I'm going to be debt free in the next few months and I'll be debt free for the first time since I was 18 and I'm now 25. is quite exciting, but I just know that wouldn't have been possible without a step change. Chloe there, who has had help from the charity Step Change, but really good to hear that she's on her way out of debt now. Mick, Chloe had been able to build up debt while on a debt management plan designed to clear it.

23:08When it comes to Buy Now, Pay Later, that's not going to be possible from today. Is that right? Yes, hopefully the affordability checks and the tougher regulations will prevent that kind of harm being created by aggressively targeted buy-now-pay-later. It all depends, of course, on how well the FCA monitors and supervises the market. Hopefully, there's a thing called the FCA consumer duty. Hopefully, the regulator will use that to ensure that the firms are actually behaving responsibly. I think Chloe had on a really, really important point here about buy-now-pay-later. you know previously if you think about it if you were thinking about buying a piece of clothing or fashion or footwear and something like 51 percent of all the buy now pay later transactions are for clothing or footwear and fashion you know you would have gone along you would have looked for the piece of clothing and then you would have arranged the credit separately so it was like a split process so you had to think about arranging the credit whereas the real danger with buy now pay later is it is a thing called embedded finance so you can buy the product and arrange of credit almost simultaneously at the click of a button.

24:15And that means, you know, as I say, they're very, very good at encouraging people to do impulse buying and not realising they're actually taking on credit they might not be able to afford in the future. It's so frictionless, isn't it? It is frictionless. That's exactly the phrase. Matt, Chloe talks about it almost like it's an addiction. She does. And Chloe's done an amazing job over the last seven years in her journey into becoming debt free. But despite that, you can see that she's still taking out additional Buy Now, Pay Later products. And I think to that point, that talks about the addiction side of it and how, you know, despite the steps that she's taken to be debt free, it's very easy to get dragged back into it because of how easy it is to access.

24:52Now, I've mentioned that Buy Now, Pay Later can be interest free. It's not always, is it? What happens, Matt, if you miss a payment? Yeah, so it is interest-free until a payment's being missed. And then from that point, they can add on additional charges and charge additional interest at that point. And that's something that a lot of customers that we support aren't aware of. They're not aware of that information. So hopefully with the new regulation that's in place, they'll have a much better oversight of what the consequences are if they do get into difficulty. Okay, well, let's hear from Julika now, who found herself getting into difficulty when she made lots of different purchases.

25:28I was in the middle of moving houses. So I thought, oh yeah, it'll be great because I'll need, you know, furniture, dining tables, freezers and things like that. Because I've got two tips as well. You know, I've got this buy now, pay later to just get the baby gates, get the cot, get the bed, get the ton of the beds, things like that. It was things that I did need, but it was just the speed of how much I was buying. I think the highest was a grand and a bit. I just think, why was I ever introduced to these buy now, pay later auctions? It might sound dramatic, but my life was easier before that.

26:00I had better management on my money. It massively affected my credit score, which at the time, I was a bit younger, so I didn't think, oh yeah, credit score is not that important. I won't be buying a house anytime soon. But now that I'm getting old, I'm realising just how important it actually is. These new changes, I am glad that it's been implemented as long as it's been implemented the correct way. It depends on whether these buy now, pay later companies are constantly doing these checks. Are they reconfirming? Are they rechecking? I don't mean a basic check of, you know, can I know what your income is?

26:32I mean, like providing proof. And in that way, it could, you know, help. But there's no point when it's one and done. Thanks to Julika for sharing her thoughts. Matt, she was able to build up a lot of debt across several different buy now, pay later purchases. Will the new rules mean that lenders can see when there are multiple debts linked to one person? Especially when that's under the one organisation, it will. So what's essentially allowing you to do is the checks and the affordability checks are done after each transaction or each request, rather than one initial check. OK, but if you're sort of borrowing with one company for one purchase and another company with another, will that be kind of factored in?

27:10So that's not something I'm aware of or sure of at the moment. Mick, do you want to come in on that? Yeah, I mean, I think one of the, hopefully there's another thing going on at the moment called the Credit Information Market Study the FCA is doing, and they are looking at how to require all types of lenders to report better data to credit reference agencies so all lenders will have a better picture of a consumer's total borrowing exposure. So I think there's still work to be done on that. But certainly these rules are designed to, they are designed to try and make sure that any form of credit, and buy now, pay later is a form of credit, is affordable and sustainable for people who use it.

27:49It is a good product that people can use it well, but the evidence shows that far too often it actually worsens the position of people who are already in financial vulnerability. So it should lead to a better market. Just to reiterate, there's nothing in the FCA's rules that will stop buy now, pay later providers providing credit to people they think can actually afford to repay it. So this is not nanny state regulation. This is not causing financial exclusion. This is intended to lead to a better market for everybody. OK, shall we finish with a very quick final thought from both of you? Nick, I suppose in a sentence, retailers wouldn't be offering this if it didn't encourage us to spend more.

28:24That's exactly it. You know, so this should stop unaffordable borrowing. But the reason why the likes of Clarion and the rest of them are happy with this is that it is not going to stop the impulse buying. They're still going to do very well out of it. Matt, in half a sentence, what's your golden rule for making buy now, pay later a helpful tool, not a spanner in the works? Take a beat, have a think about it before you take the purchase out. And if you can't quite afford it, try and get some support elsewhere. And that is all we've got time for in today's Moneybox Live podcast. Many thanks to everyone who's been in touch.

28:53And thank you to our experts. We've been hearing from Mick McAteer from the Financial Inclusion Centre and Matthew Sheeran from Money Wellness. By the way, with the Moneybox podcast, you can always subscribe now and listen later. And I promise the only financial impact will be positive. Paul Lewis is back with Moneybox at midday on Saturday. If you thought buying a house was already painful enough, then do listen as he explains what gazundering is and why it's on the rise. Remember, we want to cover the stories that matter to you, so get in touch. You can email moneybox at bbc.co.uk. You can send a voice note or a comment on WhatsApp.

29:30The number is 033 06783 183. In this podcast, the producer was Craig Henderson, The studio manager, Chloe Wilson. Production coordinator, Niamh McDermott. Our editor is Jess Quayle. I'm Felicity Hanna and this was a BBC News money and work production for BBC Sounds. I'm the BBC's climate editor, Justin Rowlett. In the 20 years I've been covering the green movement, I've noticed its evolution has been formed not only by protest or by dire warnings about climate change, but by conflict within the ranks. Friends, sometimes enemies, hashing out big ideas that help define what it means to be green.

30:13The anger was justified. That action was not. This would grow to become the number one domestic terrorism threat in the United States. We might lose this fight, but we win the whole war. For BBC Radio 4 from Understand, 10 fights that made the green movement. Listen first on BBC Sounds.

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