Digital bank Monzo has entered the controversial “buy now, pay later” market for the first time, sparking fresh concerns about consumer overspending.
The bank has become a rival to established players such Klarna in offering short-term credit for purchases. However, these loans have been subject of fierce criticism for encouraging users to spend money they do not have.
From today, Monzo customers will be able to spread the cost of any online and in-store purchases over £30 using its app. Retailers do not have to be a partner of the scheme, Monzo’s Kunal Malani said.
Splitting a purchase over three monthly payments will not incur any interest charges. However, loans of six or 12 months will attract an interest rate of 19pc.
Buy now, pay later schemes have been criticised for making it easier to fall into debt because of how easy they are to use, and also for breaking saving habits. Monzo said its lending will be based on affordability checks and credit will be limited to £3,000. Mr Malani said the company will not use bailiffs to recover problem debts.
Monzo has more than five million users, with many young people having been attracted to the provider thanks to its easy-to-use app and distinctive “hot coral” colour bank cards.
Its arrival in the buy now, pay later space follows a report for the City watchdog, the Financial Conduct Authority, that recommended the sector be regulated for the first time.
Alice Tapper, a financial campaigner who wants to see the sector regulated, said: “We’re seeing this flurry of activity and new entrants coming onto the market making hay while the sun shines.”
However, she said there had been a “worrying lack of movement” from the watchdog since it announced plans to regulate the sector in February.
Sue Anderson, of the debt charity StepChange, said buy now, pay later often encouraged poor spending habits.
“More than a third of StepChange clients with buy now, pay later debts are under 25, and those who have used buy now, pay later typically have 8 or 9 other debts, which suggests these debts are adding to some younger people’s financial distress,” she said.
“Due to a lack of regulation, it’s not clear whether these services are treating customers fairly and in a way which is consistent with other credit products.”
Unlike many of its rivals, Monzo will not make money from retailers, just interest payments. Customers who cannot pay will not be charged a late fee and will have seven days to opt for a new payment plan, Mr Malani said.
After that, if the new payment plan fails, “at some point unfortunately the debt will get written off and reported as written off” to the credit agencies, he said.
Asked whether bailiffs will eventually be sent to recover losses, Mr Malani said “we don’t operate like that”.
“What we’re looking to do in a regulated way, is give customers visibility and control over the debt they incur,” he said. “It’s not like something that happens at checkout impulsively.”
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