Monzo launches Monzo Flex 'buy now, pay later' - what you need to know

Monzo has launched a new 'buy now, pay later' (BNPL) product called Monzo Flex, which will allow customers to split the cost of purchases into three interest-free payments, with any retailer.

The digital challenger bank says Monzo Flex is the 'better' way to pay later compared to existing BNPL schemes, credit cards, loans, and overdrafts, offering shoppers more flexibility and control with their borrowing.

Monzo Flex will be rolled out to a small group of customers from today (16 September) and if you're part of the early access group you will find Monzo Flex as an option in your Monzo app.

Here, Which? explains how Monzo Flex works and what you need to know before jumping in.

Have you ever had an issue with a BNPL scheme? Tell us about it using our new BNPL complaints form.

How does Monzo Flex work?

Monzo Flex will allow you to pay for any purchase over £30 at any retailer that accepts Mastercard (in-store or online) in three instalments, interest-free.

Alternatively, you can opt to split the payment into smaller chunks with pay-in-six and pay-in-12 options, but these plans will attract an interest rate of 19% APR (variable).

Whatever plan you go for you can make the first payment at the time, or in 14 days' time.

So for a £249 purchase at Apple, for example, you could choose to:

• split the cost of the purchase over three instalments paying £83 on the day, £83 the following month and another £83 two months later without attracting any interest;
• split the cost of the purchase across six instalments paying £44 on the day and then £44 across the next five months, paying back the full £249 plus £15.32 of interest;
• or split the cost of the purchase across 12 instalments paying £23 on the day and then £23 across the next 11 months, paying back the full £249 plus £27.24 of interest.

There's also an option to split a payment after you've made a purchase or as Monzo puts it 'Flex now or later'. This feature means you can select a payment up to 14 days after the transaction and select a payment plan for it. Monzo will then refund the amount and take your first instalment payment.

The images below show how the payment options will appear in the app for a purchase and how you can manage multiple payment plans for different purchases.

• Find out more:BNPL fees and conditions compared

How much can you borrow?

When you sign up for Flex, Monzo will carry out an affordability check. This will involve a soft credit search, which isn't visible on your credit report to other lenders.

Once Monzo has assessed your affordability, it'll offer you a credit limit of up to £3,000.

At this point, you'll be asked to agree to the terms of the borrowing agreement and Monzo will then carry out a hard credit search, which will appear on your credit report and be visible to other lenders.

Monzo Flex showing up on your credit report is a good thing as it means other lenders can more accurately assess your ability to borrow money, so you should avoid falling into unmanageable debt. It also means you should be able to boost your credit score as long as you keep up with your repayments.

• Find out more: can BNPL hurt your credit score?

What if you can't make a payment?

When you choose to pay in instalments, the money will automatically leave your account on the days you've agreed with Monzo. They will send you a notification when the payment day is coming up.

If you realise you won't have enough in your account, you can edit your payment plan in Flex and choose to pay back another day, without a charge.

A Flex payment taken when there's not enough in your account could take you into your overdraft. If you don't have an overdraft arranged with Monzo, the payment will fail.

Monzo won't charge late fees if this happens. However, a missed payment may be recorded on your credit report which could make it difficult to get other forms of credit in the future.

If you're struggling to pay back what you owe, Monzo have a team of financial difficulty specialists who may be able to put you on a repayment plan. They won't refer you to debt collectors.

• Find out more:how BNPL firms encourage you to overspend

How are purchases protected?

Monzo says returns work just like if you paid with a debit or credit card - money comes back into your account and you can choose to pay back the Flex agreement right away or not.

When you pay for something with a virtual Flex card - due to be released in the coming weeks - you'll benefit from Section 75 protection. Thisallows you to make a claim to your credit provider to get your money back if something goes wrong, as long as the price of the goods or services were worth between £100 and £30,000.

However, you won't have Section 75 protection when you flex a transaction on your Monzo debit card.

If there is an issue with your purchase, could make a chargeback claim and Monzo may be able to get you your money back.

• Find out more:Section 75 explained

Is Monzo Flex right for you?

Monzo says it has improved on the myriad of existing ways there are to pay later including BNPL schemes, credit cards, loans and overdrafts, by putting the customer first and tackling the pain points of borrowing. But there are some things to consider before using it.

You might be able to borrow at a cheaper rate

While breaking down the total cost of an item into smaller chunks is even more convenient with Monzo Flex, it's not always cost-effective.

There are no extra charges with Monzo's pay-in-three option, but if you choose pay-in-six or pay-in-12, you'll pay 19% interest, when you may be able to pay no interest with a 0% credit card lasting six to 12 months or a fee-free overdraft.

You need to be realistic about your other BNPL debt

Monzo says its affordability checks mean people can shop with the confidence they're spending within their limits and can manage all their payments in one place.

However, Monzo won't necessarily know if you've entered into payment agreements with other BNPL firms, unless the firms have also shared your data with credit reference agencies or Monzo can see all your other BNPL spending in your Monzo account.

This means Monzo might decide you can afford to pay back more than you actually can, and might give you a credit limit that is too high. However, you don't have to accept the limit Monzo offers and you can reduce it to something you know is more manageable.

• Find out more:how to pay off 'buy now, pay later' debts

Why BNPL needs urgent regulation

Which? is calling for greater regulation of BNPL firms to ensure the risks of using these schemes is made clear to consumers.

We're especially concerned about the potential harm BNPL schemes pose to vulnerable consumers.

While Monzo offers a BNPL product that runs affordability checks to protect customers from falling into debt and reports when customers miss payments, there are plenty of other BNPL schemes that don't.

Our previous research found that almost a quarter of BNPL users spend more when using the schemes than they normally do. Meanwhile, Citizens Advice has found evidence that BNPL can be a slippery slope into debt.

The Financial Conduct Authority announced in February that BNPL schemes pose a risk to consumers and should be regulated to protect them from harm.

Which? believes these firms can't be relied upon to regulate themselves. To ensure consumers are protected from harm, the FCA must step in and regulate the market as soon as possible.

• Find out more:BNPL schemes to be regulated

This story has been updated since it was first published. It was updated on 16 September to clarify that Section 75 only applies to eligible purchases made on the Monzo Flex virtual card and not to Flex payments made on Monzo debit cards.