BERLIN, GERMANY - APRIL 22: The logo of Swedish payment provider Klarna is shown on the display of a smartphone on April 22, 2020 in Berlin, Germany. (Photo by Thomas Trutschel/Photothek via Getty Images)

BNPL services have become increasingly popular over the last year, particularly as the coronavirus pandemic forced people to shop online as non-essential stores were closed during national lockdowns. Photo: Thomas Trutschel/Photothek via Getty Images

New research has revealed the pitfalls of unregulated Buy Now Pay Later (BNPL) agreements for Christmas shoppers in Britain, with two in five users in unclear of what it is they are signing up to.

The data, commissioned by Barclays, found that 36% of BNPL customers do not fully understand the consequences of missing repayments, while 52% are unaware that unregulated BNPL providers do not have to carry out robust affordability checks.

More than a quarter (27%) of UK adults have used BNPL so far, according to the study, and almost half of these admitted to doing their Christmas shopping using this payment method to purchase gifts for family and friends this year.

BNPL services have become increasingly popular over the last year, particularly as the coronavirus pandemic forced people to shop online as non-essential stores were closed during national lockdowns.

Companies such as Klarna, Clearpay, and Laybuy have offered millions of shopping alternative ways of paying for their goods, including splitting payments at checkouts, or paying for their goods, which in most cases are fashion items, in 30 days, interest-free.

A growing number of retailers have also jumped on board, including Asos (ASC.L), JD Sports (JD.L), H&M (HM-B.ST) and Marks and Spencer (MKS.L), among others.

However, concerns have been mounting that consumers will be encouraged to spend beyond their means as shopping debts continue to rise across the UK.

Read more: Watchdog to crackdown on £2.7bn ‘buy now pay later’ industry

Barclays revealed on Friday that 36% of Brits admit to using BNPL to spend more than they can afford, and 35% expect to use it more often as the cost of living increases.

A quarter of 2,000 respondents reported struggling to keep track of their spending, having taken out loans with several BNPL providers, while around one in four said this has caused them to miss a repayment.

“One of the pitfalls of unregulated products is that thorough checks on a customer’s personal financial circumstances are not always carried out, and as a result, customers may be more likely to have insufficient funds available to pay back borrowing on time,” Barclays said.

It also provided advice to those signing up to new credit agreements, asking consumers to ask: what is the cheapest form of credit for your needs; can you afford the repayments; how will you manage the repayments; and what level of protection are you looking for.

Watch: Should I pay off debt or save money during the coronavirus pandemic?

Antony Stephen, chief executive of Barclays Partner Finance, said: “This research shows that more must be done to educate consumers using unregulated ‘buy now pay later’ products.

“Too many people are taking out these loans without realising the impact it could have on their finances and with festive shopping in full swing, it’s important shoppers don’t run the risk of signing up to agreements, which they may struggle to repay affordably in future.

“To protect consumers against taking on more debt than they can comfortably afford to repay, and to ensure minimum standards exist across the sector, we believe regulation should ensure all BNPL providers are required to undertake appropriate affordability assessments, consistent with those in place for other regulated consumer credit products.”

Last month, the UK government launched a consultation on buy now, pay later services for the first time ever, in a bid to regulate the sector.

The Treasury department set out “policy options to achieve a proportionate approach to regulation of BNPL”.

As BNPL is not currently regulated by the UK’s financial watchdog, there is no obligation for providers to conduct creditworthiness assessments as part of taking on new customers or when entering into individual agreements.

“There is always a balance to be struck to ensure that consumers are given appropriate protections without unduly limiting the availability and cost of useful financial products,” the consultation said.

The Treasury will decide how the sector’s credit checks, fees and marketing are regulated, and will be seeking views on where it should draw the boundary for regulation of BNPL products.

READ MORE: Klarna’s $650m mega-round makes it Europe’s most valuable private fintech

The consultation said the government is open to receiving feedback on its suggestions until 6 January.

The changes proposed also include highlighting disclosures on the consequences of using BNPL services, such as arrears fees or debt being transferred to a debt collection agency.

“When lending is regulated, robust affordability assessments are required on a customer’s personal financial circumstances before a loan is approved. This ensures credit is affordable, and that the customer is only borrowing what they are comfortably able to pay back,” Barclays said.

“One of the pitfalls of unregulated products is that thorough checks on a customer’s personal financial circumstances are not always carried out, and as a result, customers may be more likely to have insufficient funds available to pay back borrowing on time.”

Watch: How to prevent getting into debt