Cause for concern over the BNPL boom
Buy-Now, Pay-Later (BNPL) services are among the fastest growing in the consumer credit industry. There are an overwhelming number of options for Australians, with a diverse range of features, fees, and borrowing limits, all targeted at different demographics.
In addition, there has been great interest shown in the industry by established big-tech and big-banks, raising further issues for consumers and policy-makers alike. Despite the enthusiasm for BNPLs, driven by innovation and competition within the industry, these services have the potential to pose a serious problem to consumers’ finances.
Research into the industry has revealed that 21% of buy-now, pay-later users missed a payment in FY19. In order to reduce this figure, and to ensure individuals make a choice that is right for them, greater awareness of both the potential benefits and pitfalls of BNPL use is required.
The existing problem with the BNPL industry, which poses significant risks to consumers and users of these services, is the regulation, or lack thereof, of buy-now, pay-later. The industry operates in a regulatory void, thanks to competing jurisdictions and government passivity on the issue thus far.
The Australian Securities and Investments Commission (ASIC), the Australian Competition and Consumer Commission (ACCC), and the Reserve Bank of Australia (RBA) all have regulatory authority over elements of BNPL provider’s business practices which, in conjunction with the relative infancy of the industry, has created the conditions for a lack of comprehensive regulation.
As has been pointed out by many, buy-now, pay-later is a form of credit, despite the fact that it is not labelled, and not regulated, as such. In a Senate Economics References Committee report on credit and financial services that are targeted at Australians at risk of financial hardship, it was stated that BNPL products are not considered as credit under the National Consumer Credit Protection Act 2009, thanks to the wording of the Act and a series of exemptions, that BNPLs fall under.
With BNPLs not being considered as credit products, users of the services are not covered by the consumer protections laws, only the BNPL industry code of practice, which is widely considered to not go far enough, especially when it comes to non-compliance and breaches of the Code.
In the same Senate Economics References Committee report, it was noted that because BNPL providers are not subject to responsible lending and financial-hardship obligations, there is no requirement on them to consider the income or existing debt of customers.
In response to the loophole BNPLs operate within, ASIC has outlined their new Design and Distribution Obligations coming into effect in October 2021, will focus on positive consumer outcomes. The impact of these new regulations will have remains to be seen, but what is clear is that stronger and more relevant regulation is required, to protect consumers from harm.
In addition to the dearth of regulation, BNPL’s pose a risk to their users in terms of the habits they create. As noted by ASIC, BNPL’s can fuel overconsumption, and create unhealthy spending behaviours, with the financial services regulator suggesting that users of buy-now, pay-later services can be more impulsive, and find themselves spending more with BNPLs than they usually would.
These spending habits can come at a cost, with evidence suggesting some BNPL users experience disproportionate financial hardship, including taking out additional loans and cutting back on or going without essentials, so as to make their BNPL repayments on-time.
These concerns surrounding the lack of regulation of buy-now, pay-later services have been raised amidst significant development in the industry. 2021 thus far has been a big year of movement in the industry. A range of big-banks and established tech companies have entered the BNPL sector, each offering a range of differing and competing features.
Among the most notable developments include: PayPal activating their instalment payment option, Pay in 4, with the promise of no late payment fees; Apple entering into the sector with Apple Pay Later, partnering with Goldman Sachs; and locally, CBA offering a BNPL service with StepPay, launching later in the year. In more news for the BNPL sector, US payments platform Square announced their intention to acquire local industry leader AfterPay for A$39 billion, the largest transaction in Australian history.
In addition to development in the number of BNPL operators, BNPL use has changed in recent times. According to ASIC during the COVID-19 pandemic, there was continued growth in the sector, with BNPL transactions increasing by 43%, and the number of new users growing by 25%. With the continuing rise in popularity for BNPLs, greater consumer awareness of the risks of paying in instalments is required.
As the number of local and international competitors in the buy-now, pay-later industry continues to grow, along with the numbers of users, the demands for increased regulation and consumer protection will grow along with it. The impact of increased attention and regulation for the industry remains to be seen, but what is clear is the BNPL industry will continue to roll on in 2021 and beyond.
Drew Mackey is a Master of Applied Policy Student at the University of Technology, Sydney, where he is researching the effect of cognitive biases on young people’s use of buy-now, pay-later services. He has a keen interest in foreign policy and international affairs, honed through living and studying in France.
