Why UK consumers need quick credit to stretch their budgets

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The corporate TikTok account for Zilch offers brunch plates, tourist rides and snacks for the office dog: buy now, pay later (BNPL) as a lifestyle.

The London-based loan provider, which launched about two years ago and is now valued at $2 billion, says it serves for both treats and essentials, giving shoppers a chance to cover the cost of purchases distribute and earn cashback rewards.

Zilch users’ TikTok videos have different vibes.

“If you are struggling before payday and need a money hack?? Download Zilch! Game Changer,” reads a caption above a video showing milk, coffee, pasta and cookies. The user added that he makes refunds every two weeks.

With UK inflation expected to hit 13 per cent later this year as the country slides into recession, Zilch and his BNPL peers are figuring out how their clients use short-term credit in a downturn.

Michael Quinn, 36, who is unemployed and lives in Glasgow, uses Zilch to spread the cost of his groceries and energy bills over six weeks and pay them off with his state benefits.

He started using the service last summer after exhausting his credit cards, which he had been relying on during the Covid-19 lockdowns beginning in early 2020.

“With benefits, it’s sometimes difficult to have extra money to pay for certain things,” says Mr. Quinn.

He admits he got carried away with zilch in the beginning, owed hundreds of pounds, and says there needs to be regulation.

Still, he believes it’s better than credit cards, which he’s sworn off for good once he’s settled about £2,000 ($2,309) of outstanding debt.

Larris Grant, 29, uses Zilch for everything she buys, from groceries and clothes to Amazon deliveries.

“I don’t use it as a lifeline; but if I have to, I know I can do it,” says the hotel manager on duty.

Ms Grant signed up in 2021 after receiving a £20 rewards link from a friend and is now collecting cashback on purchases – which is not the case with her credit card. That perk helped pay for her kids’ school uniforms, she says.

While she doesn’t use it to pay for electricity, Ms Grant says it could prove “handy” as her monthly bill has gone from £90 to £230.

The UK price cap on annual energy bills is expected to rise to almost £3,600 per household by the end of this week, about triple last year’s level, and will come into effect for the last three months of the year. In 2023 it is expected to rise even further.

Zilch is just one vendor in a booming short-term loan market.

Sweden’s Klarna Bank, San Francisco-based Affirm Holdings and Australia’s Afterpay have added millions of new customers around the world in recent years, although investors have begun to express concerns about how long some of them will continue to grow and at the same time can lose money.

Big banks like the NatWest Group are also launching similar products.

According to Citizens Advice, one in 12 people turned to BNPL for basic expenses such as groceries and toiletries in the six months to March 2022.

The consumer advocacy group likened this loan to “quicksand,” finding that young people, those in debt and those on low income who are unemployed or on benefits were twice as likely to have used BNPL for basic necessities as the general population.

Short-term credit has served a purpose in the UK for more than a century and has a lifespan well beyond online startups. In August, Iceland Foods, a British supermarket chain, introduced a BNPL option for struggling shoppers, particularly those struggling to make ends meet during the school holidays.

Open the Zilch app and after the cool green splash screen and spending tracker, you’ll see a list of thousands of retailers.

Scrolling down brings up supermarkets like Asda and Sainsbury’s, Deliveroo and Uber Eats, as well as travel, beauty and home improvement sites.

Customers have two options: pay off their purchases over six weeks with no interest or late fees, or pay right away and collect 2 percent cashback.

Like some of its competitors, Zilch has affiliate agreements with stores that pay the company a small fee for customers sent to them.

The app can also be used on other sites that accept MasterCard, with the customer paying a small fee instead – although there is a prohibited item list that includes alcohol, gift cards and cryptocurrency. Since its launch in 2020, the FinTech has attracted 2.5 million users.

In June, as other fintechs like Klarna watched their valuation crater, Zilch extended its funding round to keep its value at $2 billion. The recent fundraising announcement highlighted that “mature customer cohorts are now using Zilch on a daily basis.”

To celebrate its billion dollar status, Zilch features a neon green unicorn at the entrance to its London headquarters.

Chief Executive Philip Belamant co-founded the company as an alternative to high-yield credit, believing customers were being poorly served by an industry that had changed little in 80 years.

Zilch’s products “offer the customer the cheapest way to pay by credit or debit card, with the greatest value,” he says.

Mr Belamant, 37, is proud of Zilch’s status as a regulated company with a consumer credit license granted by the UK Financial Conduct Authority in 2020. This is unusual in the BNPL industry, which has grown so rapidly in part because it is exempt from regulation on products that charge interest. Mr Belamant says this is not “healthy” for the sector.

He’s also aware of the problems that short-term loans can cause, noting that Zilch doesn’t allow users to pay off their accounts with a credit card and go from debt to debt.

We know that the cost of living crisis affects everyone, especially those with lower incomes or poor credit ratings

Toby King, representative of the Advertising Standards Authority

The company works with credit-checking company Experian to ensure customers can afford a loan. But Mr. Belamant is otherwise open to customers using debt to pay for groceries.

“It’s okay for people to buy fast fashion that’s going to landfill in six weeks. But for groceries that people need or something essential for their family? No, they should use expensive loans for that,” he says. “We just don’t understand how you reconcile that logic.”

Still, the way Zilch markets itself has changed. Previous ads had slogans like “Eat now, pay later” under hamburgers and pizza. Now social media posts say, “Please spend responsibly.”

Last week, the Financial Conduct Authority said it was “proactively monitoring” the sector and would use criminal and regulatory enforcement powers if it saw promotions – including posts from social media influencers – that did not provide clear warnings about the risks involved.

Advertising Standards Authority representative Toby King says BNPL ads must not specifically target vulnerable groups or exaggerate a service’s speed and ease of use, and clearly spell out any relevant terms.

The regulator ruled against Klarna in 2020 over sponsored Instagram posts claiming spending would lift customer spirits.

UK cost of living crisis – in pictures

“We know that the cost of living crisis is affecting everyone, especially those with lower incomes or poor credit ratings,” King said. “That’s why it’s so important that marketers of delayed payment services [BNPLs] advertise soberly, responsibly and accurately.”

Consumer groups are already warning that some BNPL customers are in trouble.

“We saw a buyer threatened with debt collectors after he split payment for a t-shirt and more recently worried two in five BNPL customers who borrowed money to make repayments,” says Clare Moriarty, Managing Director of Citizens Advice.

People are using credit cards, bank overdrafts and loans from family and friends to pay off their BNPL payments, according to the consumer protection group.

Frontline advisors have seen customers unaware they were taking out a loan when they were presented with a “spread costs” button at the online checkout. Research from Citizens Advice showed that BNPL buyers were billed £39m in late fees in the year to June 2021, with one in three users missing or making a late payment.

Almost two-thirds of UK BNPL users are under 40, according to the Money and Pensions Service, a UK government-sponsored financial charity.

A key concern for Chief Executive Caroline Siarkiewicz is consumers, who are prioritizing BNPL repayments over other obligations such as rent and council tax bills, which has been “really detrimental to people”.

The lack of regulation in the sector is felt strongly by 25-year-old kindergarten teacher Chloe Porter, who has been paying off her loans for seven years.

She used Klarna when she was 17, mainly for purchases of £20 or £40.

“It all adds up to this very long-term problem that can balloon very quickly if you then start getting angry letters and phone calls,” she says.

By the time she turned 22, she owed Klarna, online retailers Littlewoods and Very £5,000, as well as her credit card bill with Capital One – which she had used to pay off her BNPL loans.

“Not knowing much about credit, I just stuck my head in the sand, which is the absolute worst thing,” says Ms. Porter.

According to Sarah Coles, senior personal finance analyst at investment firm Hargreaves Lansdown, it’s now a growing problem in the “squeezed middle” age groups as well. “People think it’s just spreading the cost,” she says. “So they don’t realize they’re just signing a loan agreement.”

In some cases, the loan products are marketed to people who are less financially resilient, says Richard Lane, director of external affairs at debt help StepChange.

“You may have started a purchase now, pay a loan later; If they find they are having trouble checking out, they may have made a payment using a credit card. They will then ultimately try to spin the plates and balance them for as long as possible.”

It fits the experience of David, 36, an aviation worker who once owed £26,000 in payday loans and believes he is now specifically targeted by BNPL payment options.

He’s received texts and emails from providers – although he’s never used them – and fears his dates have been flagged as someone vulnerable to credit. He did not want to give his last name in these conversations.

“Personally, I think of buy now, pay later as a rebranded payday loan,” he says. “It’s a very slippery slope and I found it out the hard way.”

Updated September 8, 2022 at 5:00 am

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