Buy Now Pay Later (BNPL) schemes are relatively new in the retail credit space but are making their significant presence felt in the supply market for retail credit – and also for unwary consumers.
In short, BNPL provides immediate credit for retail purchases, allowing the consumer to defer immediate payment to (usually) four subsequent fortnightly payments. The attraction of the system is that there is no extra cost to the consumer – the credit is funded by the retailer paying a merchant fee and by fees being payable to the BNPL provider on late payments.
BNPL schemes by their nature are not currently governed by the Uniform Consumer Credit Code and accordingly many of the protections traditionally available to consumer credit customers are not available.
ASIC has recently reviewed the operation of BNPL and made some interesting findings.
On the supply side, ASIC notes that the use of traditional credit cards is in decline, with the rise in the adoption of BNPL. We note that the traditional banks have recognised that and have in many cases have either partnered with, or started their own, BNPL scheme.
Most disturbing are the findings about the impact on consumers. Approximately one in five customers are missing payments, thus incurring late fees – the volume of which in the 2018-19 financial year has increased in absolute terms over the previous financial year by 38%.
Interestingly, over the same period the number of BNPL transactions increased by 90%.
ASIC also revealed statistical evidence of consumers going without essentials (such as meals) or worse, taking out additional loans, in order to make their BNPL payments on time.
This disturbing finding is unfortunately a natural consequence of the nature of BNPL.
Consumers often take out this credit because they cannot pay for a purchase outright. They then find the following month that, due to their existing obligations, they need to make the next purchase on BNPL – entrenching their dependence on the delay.
In many ways this is similar to the credit card debt spiral that many of us have observed (or perhaps experienced), but with different parameters.
First, the amounts involved in BNPL transactions are often smaller than normal credit card limits.
Secondly, a credit card payment is usually only due “next month” and there is a sense of mañana about payment. BNPL requires attention within the fortnight.
Allied with this is that minimum payment on a credit card is a small percentage of the total debt. BNPL aims to have full repayment in four cycles.
As insolvency practitioners, we see all types and causes of personal financial failure. We regularly see individuals who become bankrupt either directly because of, or with a dominant, credit card debt.
Lately we have been seeing individuals who become bankrupt with, rather than because of, BNPL debt.
However, at the coalface there are a significant number of consumers facing financial distress over their BNPL debts. ASIC is presently gearing up to address potential legislation with a view to increasing protections for unwary consumers.
In the meantime, spend wisely!