The Buy Now Pay Later (BNPL) sector continues to grow rapidly in Australia and new entrants continue to emerge;
There are some concerns that the BNPL business model, which is not currently covered by the National Credit Act, means that some consumer protections are not applicable and consumers are overextending themselves;
A number of regulatory inquiries have been conducted which raise the question whether the responsible lending obligations should be extended to BNPL and instalment payment arrangements.
POINT OF VIEW
Buy Now Pay Later (BNPL) refers to an arrangement that allows consumers to buy and receive goods and services immediately from a merchant, but pay for that purchase over a set period of time, without being charged interest. This is an important distintion between BNPL products and PayDay Lending, which has faced significant scruity.
The repayment arrangements between consumers and BNPL providers vary between the different providers. A prominent example is the repayments via four fortnightly instalments offered by Australia’s largest BNPL provider, Afterpay. This is similar to a lay-by system, but because the BNPL provider takes on the risk of default from the merchant, the purchaser receives the product upfront.
These BNPL arrangements can be used to finance both larger scale purchases such as travel and daily necessities such as groceries and fashion items, and can be available both online and in-store.
A typical transaction involving BNPL usually involves contracts between:
A consumer and a BNPL provider;
A consumer and a merchant; and
A BNPL provider and a merchant.
BNPL providers generate revenue through various combinations of merchant fees, consumer fees and late payment fees:
Revenue earned by BNPL providers (FY 2017-2018)
SOURCE: ASIC Review of BNPL Arrangements
BNPL is a rapidly growing industry. Between 2016-2018:
The number of BNPL transactions in each month has grown from over 50,000 transactions to 1.9 million transactions;
The total balance of outstanding debt from these arrangements has also grown from $476 million to over $903 million;
In just two years the number of merchants signed up to BNPL has grown by over fifty times; and
The total revenue of the six leading BNPL providers increased from $32 million to $78 million.
BNPL arrangements can be more attractive to consumers than other types of credit for several reasons, prime among them being that they do not generally charge interest. ASIC consumer research found that users also saw BNPL arrangements as easy to use, convenient, and ‘less risky’ than other payment options. Ninety precent of users believed that BNPL arrangements helped them ‘manage their spending by spreading payments over time’, sometimes referred to as ‘consumption smoothing’. More than four in five users planned to use a BNPL arrangement again.
While BNPL users are generally younger and have lower incomes than the average consumer, the availability of BNPL arrangements have been found to influence 70% of users to make more spontaneous purchases and 81% to buy items that they could not otherwise afford in one payment. ASIC’s research also shows that 16% of BNPL users experienced at least one type of negative impact due to a BNPL arrangement, including becoming overdrawn, delaying bill payments, and borrowing additional money from family, friends or another loan provider, including credit cards.
BNPL providers do not need to comply with the responsible lending obligations in the National Credit Act (the Act). These are regulations that require credit licensees to inquire into the consumer’s financial position and make an assessment as to whether the consumer would be able to repay the amount without substantial hardship, and prohibits them from providing credit that would be unsuitable for the consumer.
BNPL providers are not required to comply with these obligations because they do not fit the traditional description of credit providers, under the Act. In particular, because they do not charge consumers for providing the credit, the arrangement is not regarded as ‘credit’ under the National Credit Code. An arrangement is also beyond the purview of the Act if it is lent for a term of 62 days or less, fees and charges do not exceed 5% of the amount of credit, and interest charges do not exceed an amount equal to 24% per annum.
In practice, BNPL providers do take some steps to refuse some applications and prevent customers from accumulating excessive debt. For example, if a consumer misses a scheduled repayment, most BNPL providers suspend that customer’s ability to make additional purchases until they have remedied the missed payment. Some set spending caps, which can only increase incrementally with a positive payment record. However, this does not prevent consumers who have missed payments to one provider accessing another provider, or in some cases simply opening a new account.
Regardless, some consider these regulatory circumstances to constitute a ‘loophole’, which has prompted concerns from consumer advocates that important consumer protections are not being provided. Among other things, concerns such as these have led to a series of reviews and inquiries aiming to develop a broad understanding of this industry and identify potential risks for consumers.
In November 2018, ASIC released its ‘Review of Buy Now Pay Later Arrangements’. It concluded that because BNPL arrangements are regarded as ‘credit facilities’ under the ASIC Act, ASIC does have some jurisdiction over them.
In the report, ASIC explicitly acknowledges that BNPL providers are not required to comply with the responsible lending obligations in the Act, but says that whether these protections are adequate and whether additional safeguards are required remain open questions:
“… it may be that BNPL providers should be required to comply with the National Credit Act. ASIC has not yet formed a view that this is necessary. Our ongoing monitoring of this industry will help us to assess whether we should advise the Government to consider further law reform.”
More concrete was ASIC’s position that as a first step, their product intervention power should be extended to all credit facilities regulated under the ASIC Act:
“This would allow us to act quickly and effectively to address the causes of problems if we identify a significant detriment to consumers that cannot be resolved through voluntary action. In using the product intervention power, we would look for interventions that represent the most targeted and appropriate regulatory solutions to address identified consumer detriment.”
In February 2019, The Senate Economics References Committee also published a report from its ‘Inquiry into Credit and Financial Products Targeted at Australians at Risk of Financial Hardship’.
This inquiry received a number of submissions, including from the Consumer Action Law Centre (CALC) and the consumer advocacy group CHOICE. These argued that the growth of BNPL providers comes at a time when Australians hold record levels of household debt, and has seen an increase in calls to the National Debt Helpline.
The Committee Report contained 20 recommendations, including additional funding for financial rights centers and counselors, and that the BNPL sector develop a code of conduct. However, government senators on the committee rejected several of the recommendations.
As a result of the new powers handed to ASIC under the passage of key financial services reforms contained in the Treasury Laws Amendment (Design and Distribution Obligations and Product Intervention Powers) legislation, they have been given the power to intervene where there is a risk of significant consumer detriment. ASIC used this new power in September this year, when it issued a Product Intervention Order on Short Term Credit, which related to payday lending rather than BNPL.
However, despite the increased and continued regulatory and political focus on the BNPL sector, recent announcements by CBA, Latitude and the newly-ASX listed Sezzle suggest it still remains extremely attractive to new entrants in the domestic market. One of the main reasons for this being the dramatic shift in purchasing behaviour as a result of the BNPL model, from traditional credit products.
An example of this being the recent announcement by ME Bank to shelf its planned credit card product, as a result of the growth of BNPL. Recent upgrades to share price targets by Goldman Sachs suggests that investors, not only consumers and merchants, cannot get enough of BNPL.