Buy Now, Regulate Soon

Submissions closed yesterday on the Ministry of Business, Innovation & Employment’s discussion paper 'Buy-Now,Pay-Later – Understanding the triggers of financial hardship and possible options to address them'. Increased intervention in this sector in New Zealand seems inevitably on the horizon.

What is Buy Now, Pay Later?

The clue’s in the title. BNPL is a service that lets consumers purchase goods and services at participating businesses usually by paying only an initial instalment – typically using a mobile app at the point of sale. The merchant is paid for the goods or services by the BNPL provider, which allows the customer to take possession up-front. The customer then pays back the BPNL provider by weekly or fortnightly instalments, drawn from the customer’s linked debit or credit card. Default fees are usually added to the debt if a payment instalment is missed, although BNPL providers’ main source of revenue is the fees they charge merchants to use their service.

The appeal of BNPL for consumers is obvious. There are no upfront fees on the purchase. And BNPL can be an effective way to spread the costs of purchases without paying interest, much like the old-school “layby”system but with the added benefit that legal title and possession pass to the purchaser upfront. As the sector grows in New Zealand, BNPL can be used across an increasingly diverse range of products and services, including to purchase groceries, clothing, school equipment, electronics, whiteware, dental treatment, vehicle repairs and haircuts. Financial comparison site Finder reported this year that 31% of Kiwis have used a BNPL service within the last three years, and that BNPL is particularly popular with younger consumers.

For businesses, BNPL can generate additional sales from customers who might not otherwise be able to afford the full cost of goods and services upfront. And not accepting BNPL may mean sales are lost to competing businesses that do.

BNPL providers are riding the wave of popularity and growth being experienced by the wider fintech sector, with innovation in financial services and investment in fintech at an all-time high. (As evidence, US fintech Square recently purchased the Australian BNPL provider Afterpay for US$29 billion.)

So, what’s the problem?

The answer is unchecked consumer spending by people who can’t always afford it.

MBIE says that the success of BNPL is partly attributable to consumer psychology. Customers get instant access to goods and services at a perceived lower price, because of a focus on the initial instalment rather than the full price – especially when default fees are added. This psychology is even stronger for online purchases. And BNPL has made short-term credit available to a group of consumers who can’t access mainstream credit options owing to affordability requirements.

But therein lies the potential problem. Because BNPL products don’t charge interest or fees (other than default fees) or take security, they are not required to comply with the Credit Contracts and Consumer Finance Act 2003 (CCCFA). This means that BPNL providers are not legally obliged to assess a customer’s financial position or make their own assessment whether the customer is likely to be able to repay the debt without substantial hardship, as required under the CCCFA. And once a consumer has paid the first instalment, they can’t then cancel the sale because they can no longer afford it - they have already legally purchased the goods or services.

MBIE reports that BNPL is creating financial hardship for some consumers because providers are not sufficiently assessing their income and expenses at the point of sale. Often, credit checks are made at the time a BNPL account is originally opened. But real-time affordability assessments aren’t always made to ensure that each transaction is affordable to the consumer.

This leads to some consumers missing or being late with their BNPL instalment payments, then accruing default fees. Or meeting their BNPL instalment payments but not being able to afford other expenses, such as a power bill or groceries,because BNPL payments are collected automatically via debit card or credit card. This risk of financial hardship is more when the consumer relies on more than one BNPL provider and can therefore rack up sizeable debt.

According to the Finder report, around 17% of Kiwis are carrying debt through BNPL services, and some 63% of those consumers are extremely or somewhat concerned about their current levels of debt. Data from the Australian Securities and Investments Commission indicates that around 20% of BNPL users in Australia are struggling to meet their instalment payments.

Is more regulation the answer?

One option MBIE is considering is amending the CCCFA so that it applies to regulate BNPL products. This has a certain (regulatory) simplicity to it. And, in theory, it could be possible for BNPL providers to conduct real-time affordability assessments if they had visibility over the income and expenses of their customers.  

In practice, however, this could make BNPL unworkable without the development of “open banking”. Open banking allows customers to securely share their banking data with trusted third parties through standardised technology and data sharing mechanisms. This could facilitate real-time assessments of whether an individual transaction is affordable to a consumer. This is the regulatory approach currently being pursued In the United Kingdom, where BNPL providers are being pushed to conduct affordability checks – as distinct from credit checks, which are focussed on the risk of non-payment to the BNPL provider. New Zealand is currently taking an industry-led (and therefore voluntary) approach to open banking, through the API Centre programme run by Payments NZ. However, regulatory changes are afoot here too, with MBIE also busy consulting on ‘Consumer Data Right’ legislation, which would essentially mandate open banking (as well as data sharing in other key consumer sectors).

In any case, increased BNPL compliance costs are likely to be passed onto businesses or consumers, which will increase the cost of borrowing or the cost of the goods and services themselves. Some BNPL providers contractually prevent merchants from passing on to customers the costs of BNPL credit, an issue for business owners that the Reserve Bank of Australia has recently highlighted it will change by new regulation.

MBIE recognises that aspects of the CCCFA may need to be phased in as the BNPL sector matures. Alternatively,the answer may be a voluntary industry code focussed on ensuring consumers areable to afford purchases and that BNPL is suitable for the needs of each consumer. In Australia, BNPL providers are subject to the Australian Finance Industry Association BNPL Code of Practice, which was introduced in March 2021. However, consumer advocacy groups in Australia publicly doubt that this voluntary code is adequate.

Watch this space

BNPL has rapidly disrupted the credit market by offering consumers low-cost alternatives to existing credit options, which has resulted in greater competition and more innovation in the market. The consultancy firm McKinsey has reported that, in the US, banks have lost about US$8bn – US$10bn in annual revenues to BNPL providers.  Mainstream banks and payment providers around the globe have responded by introducing their own BNPL services, or new offerings designed to attract younger customers to cheaper credit cards. BNPL concepts have also begun to extend into small business lending, with emerging players offering short-term credit or invoice financing to facilitate trade sales, with the cost of that credit shifted to the supplier and interest payments replaced with fixed fees.  This is a particularly interesting area as banks are now competing with technology platforms in the business lending space.

The New Zealand Government has recognised the benefits of the BNPL sector to customers and the wider economy. Its challenge will be to intervene in the sector only to the extent necessary to protect consumers, as technology continues to drive fundamental change in the way we manage our finances.

This article has been co-authored with our recently appointed Professional Support Lawyer, Kyra Vince.

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