• “Buy now, pay later” solutions such as Klarna have grown in popularity as a more manageable way to pay for purchases
• New research from Imperial College Business School shows how this is affecting consumer behaviour – and what it means for retailers and policymakers
• When consumers started using BNPL, they increased both the number of purchases and the amount they spent per purchase

At this time of the year most of the tabs we have open, clogging up our phone, are potential Christmas gifts for loved ones (and sometimes for ourselves). Researching a product, adding it to your basket, going to checkout… and then closing the page is a festive ritual almost as widespread as baking gingerbread cookies or putting up the tree.

Online shopping is now every bit as chaotic as in-person shopping – and even more expensive, especially when you factor in shipping costs, additional fees, etc. But it is a lot more convenient.

Adding to this convenience is buy now, pay later (BNPL) solutions like Klarna and Afterpay – a payment method that lets you pay for a product in instalments interest-free. These schemes have been growing in popularity in recent years, enabling users to spread the payment for a product over multiple paychecks. In fact, 380 million people are currently using BNPL solutions.

But instead of helping you better manage your money, could these payment schemes actually be encouraging you to spend more?

How buy now, pay later affects people’s spending

New research from Imperial College Business School explored how BNPL schemes affect people’s spending, budgeting, and perceived financial constraints.

The researchers, Dr Stijn Maesen and Dr Dionysius Ang, worked with a major US retailer to study real-world transaction data before and after the introduction of a BNPL scheme.

They found that BNPL schemes do increase the amount you spend. When consumers started using BNPL schemes, they increased both the number of purchases by around nine percent and the average amount spent per purchase by about 10 percent.

Furthermore, this was not a short-term effect. After the introduction of a BNPL scheme, they found this trend continued across the entire 26-week study, with people who were buying with credit cards impacted the most.

Why do BNPL schemes make us spend more?

Essentially we spend more using BNPL schemes because we feel like we can afford more. Regardless of how much disposable income someone has, it’s their perceived financial constraints that will decide how much they spend.

Say you get paid at the end of the month. If you want to buy something expensive, BNPL schemes will allow you to spread it over three paychecks, making it seem affordable to you right now. Payments appear less costly, and people feel like they have a greater amount of control over their spending.

For retailers, this can have significant benefits. Knowing that introducing BNPL schemes will likely increase sales, retailers can justify the initial investment and ongoing transaction fees associated with implementing and maintaining them.

The dark side of BNPL

In reality, this can be incredibly dangerous for financially vulnerable customers, who may end up taking on more debt in the long run that they can then not pay back. Although when paid on time these schemes are typically interest free, you will be charged a fee if you miss a payment.

Estimates suggest one in 10 customers using companies such as Klarna and Clearpay end up with debt collectors chasing them for repayment. Citizens Advice has described buy now, pay later (BNPL) as “like quicksand – easy to slip into and very difficult to get out of”. 

A survey from the Money and Pensions Service suggests that more than half of users have a bill they haven’t paid off yet – and half of these owe more than £100. And it’s not just high-ticket items that consumers are buying with BNPL, one in five use it for essentials like groceries, toiletries and household bills, found the survey.

BNPL is also changing how people shop, with two-thirds (69%) saying they have used it even though they’d originally intended to pay for the item in full. 

Responsible retail

The findings of Imperial College Business School’s study reveal that BNPL schemes have the greatest impact on two key groups: those who typically spend less and those who primarily use credit cards rather than debit cards. These customers are more likely to be at risk of financial difficulty compared to those making larger purchases with debit cards.

By understanding and examining the underlying reasons for these behaviours—such as the perception of greater budget control and reduced financial constraints—the research provides valuable insights that could help to regulate these schemes.

The findings allow policymakers to create targeted regulations that can minimise the potential harm to financially vulnerable consumers, to ensure that BNPL schemes remain positive for everyone.

By, Chloë Lane

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