Home » Buy now, pay later? Not so fast, as the government looks to tighten regulation

Buy now, pay later? Not so fast, as the government looks to tighten regulation

Millions of Australians have buy, now pay later (BNPL) accounts, but the easy credit may soon be harder to come by, with the government promising an industry crackdown by the end of the year. 

In recent years, Ray Smith, who lives on a disability pension near Perth, has racked up more than $4,000 worth of debt with two buy now, pay later providers, mainly Zip.

He has used it to buy everything from medical equipment to Coles vouchers as well as video games for a PlayStation.

Now, he is dealing with a mountain of direct debits and is struggling to pay back those purchases.

“It’s horrible. I feel like I’m in a tunnel I can’t get out of because I’ll make a repayment and then I spend it again to do some more shopping,” Mr Smith said.

“It just goes round and round and I’m about to start paying interest on top of that, I think it’s 23 per cent, so I’ll be paying much more.”

According to the Reserve Bank of Australia, there were 7 million active BNPL accounts, offered by companies like Zip, Afterpay, humm and Klarna, last financial year, worth $16 billion — or 2 per cent of Australian card purchases.

The companies offer customers fast money that enables them to purchase what they want, when they want it, before paying it back in instalments.

BNPL companies also offer credit contracts, usually for larger sums.

To prevent consumers from getting in over their heads, the government has been considering three options to reform the laws governing BNPL products:

  1. 1.A tougher industry code which includes an affordability test
  2. 2.Applying the credit act but tailoring BNPL’s responsible lending obligations
  3. 3.Treating BNPL like other financial products covered by the credit act, meaning they will have to hold a credit licence and would be subject to the same responsible lending obligations as banks and credit card providers

Minister for Financial Services Stephen Jones said the government wanted to ensure the industry was doing appropriate checks and that credit was not “being inappropriately marketed to vulnerable groups.”

Stephen Jones wants to have updated regulations for buy now, pay later products in place by the end of the year.(ABC News)

“It’s fair to say that the right sort of regulation will ensure you’ve got checks and balances in the lending process, in the sign-up process so that people who simply can’t afford it or people who have multiple accounts already, should find it difficult to prove the case about why they should get another account,” he said.

Mr Jones said it was the government’s “objective to ensure any changes we put in place this year”.

Small purchases adding up

The most popular BNPL products offer small amounts of credit under $2,000 but some companies, like humm, lend much larger sums up to $30,000.

If consumers manage to make payments on time, the experience is generally frictionless, all conducted online and mostly free of interest and late fees.

“You get to borrow the company’s money and pay no interest in paying that back. That fundamentally, as an idea, is a potentially very beneficial thing for consumers,” chief investment officer at Motley Fool, Scott Phillips, said.

“The downside comes when a consumer uses that service, either big or small, when they’re either not suitable for it personally or psychologically, or whether the financial risk they take isn’t understood by them or potentially the lender.”

Jay Mifsud in Melbourne’s outer suburbs first used Afterpay to buy a pair of good-quality headphones, after her lecturer belittled the brand in her bag on the first day of class.

Jay sits on a couch with a laptop on their lap and earphones on.
Jay Mifsud’s first purchase was a pair of high-quality earphones for studying audio.(ABC News: Loretta Florance)

Ms Mifsud doesn’t regret that purchase but they then started to use their account to buy lots of small things.

“The saving grace for me was that I always knew I was spending money and I knew the repercussions of spending far too much … [but] every single cent of my disposable income was spoken for and it was really, really defeating.”

Despite that frustration, Ms Mifsud never got into serious trouble and as Melbourne went into lockdown, they stopped using the app, slowly paid off what was owed and began saving money with her fiancee.

“I just saw the way that she did things … she had budgeted that she could pay her car insurance and her bigger bills annually instead of monthly, and seeing someone who took so much pride in having savings.”

Jay Mifsud sits on a couch and smiles at the camera.
By the time pay day came around, Jay Mifsud would have nothing left to spend because of Afterpay.(ABC News: Patrick Stone)

One of the challenges facing the government is creating regulation that covers the significant differences between BNPL providers.

Most providers currently adhere to their own industry code of conduct, which requires them to do a suitability assessment for purchases over $2,001.

BNPL providers all use different measures to check on a person before providing them with credit.