The Perils of Buy Now, Pay Later

I recently met the team from Henderson Budget Service who provide free advice for those who are struggling with financial hardship. There are many such organisations like this within our communities and they play a vital role in helping people to manage debt and get back to a semblance of financial stability.

FinCap (the National Building Financial Capability Charitable Trust) is the umbrella organisation that supports these financial mentoring services across New Zealand. They estimate that more than 70,000 people in financial hardship call on their services annually. One of the issues FinCap is concerned about is the rise in popularity of Buy Now Pay Later (BNPL) schemes and how these have triggered or compounded financial hardship for many people.

BNPL has proliferated in the last few years. A recent Centrix Credit Insights Report found that BNPL is the fastest-growing credit product in New Zealand: over 587,000 New Zealanders have an active BNPL account on their credit file. BNPL is especially popular amongst younger people: 50 per cent of credit-active consumers who use BNPL are aged under 30 years. Most online retailers now offer it as an alternative form of credit for buying goods. Afterpay, Genoapay, Humm, Klarna, Laybuy, Openpay and Zip are examples found here in New Zealand.

BNPL allows people to buy goods and receive them immediately, with instalment payments made over weeks or months without accruing any interest on the amount owed. In this regard it differs to layby, where purchasers don’t receive the goods until the total amount is paid off. It is a legal contract and purchasers cannot cancel the sale once the first payment has been made. Payments are fixed and cannot be altered (unlike layby). If a purchaser misses a payment, penalties are applied.

The Consumer Guarantees Act covers purchasers if the goods are faulty and need to be returned for exchange or a refund, and the Fair Trading Act ensures accurate information is available for these products (and that they are safe) before being purchased.

But while BNPL products have features of consumer credit contracts, they fall outside the strict definition in the Credit Contracts and Consumer Finance Act (CCCFA) because they don’t charge interest or fees, or take a security interest over goods.

BNPL providers therefore aren’t regulated under the CCCFA as other lending institutions are, such as banks and credit finance companies, which means there is no obligation on them to check if consumers can afford the repayments, nor to offer assistance should things go wrong for the consumer and they can no longer make the repayments.

Budgeting service providers have told me that people struggle to track their repayments with BNPL, and weekly or fortnightly payments for several purchases can very quickly mount up to several hundred dollars – money that is needed for food and rent.

BNPL makes it too easy for people to make impulse buys, with the low repayments and no interest terms being very attractive, but people can very quickly fall into a spiral of debt. Penalty fees are applied for each missed payment, and these can mount up: late payment fees, debt collection fees, transaction fees, and bank dishonour fees. Very worryingly, some consumers are using credit cards to cover their BNPL repayments which then adds monthly interest to the total to be repaid, which compounds month on month.

Consumers who default on their repayments can quickly find themselves with a bad credit rating, and this can affect their ability in the future to access other forms of loan, such as a mortgage or car loan or a credit card. Even having multiple BNPL accounts can have a negative effect on someone’s credit rating.

In November last year, the Government sought feedback on the relative benefits and costs (including financial hardship) of BNPL. There were some worrying findings. Of the 1,781 people surveyed, 90 per cent had other debts as well as BNPL; 20 per cent paid their BNPL payments using a credit card; and 20 per cent had missed at least one BNPL instalment.

And while BNPL was most commonly used for items such as clothes and shoes, technology, health and beauty items, and leisure and toys, almost half (48 per cent) of those surveyed used BNPL to buy every-day items such as groceries.

As National’s spokesperson for commerce and consumer affairs, it concerns me greatly that our current legislation is letting down our most vulnerable people. National will amend the CCCFA so that it covers BNPL type credit contracts and high-cost lender arrangements, the types of which are currently excluded under the new provisions. In the current cost of living crisis, the last thing we need is more and more people using BNPL to buy their day-to-day goods and falling into a debt trap from which they struggle to escape.

Funded by Parliamentary Service. Authorised by Andrew Bayly, MP for Port Waikato, 7 Wesley Street, Pukekohe.