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.A tougher industry code which includes an affordability test
- 2.Applying the credit act but tailoring BNPL's responsible lending obligations
- 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."
"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.
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."
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.
"Buy now, pay later doesn't attract the provisions of the National Consumer Credit Protection Act or the National Credit code," Consumer Action Law Centre CEO Stephanie Tonkin said.
"What that means is that protections in that law, such as responsible lending obligations, obligations to have effective hardship provisions, don't exist,"
Consumer groups, the corporate regulator the Australian Securities and Investments Commission (ASIC) and some of Australia's biggest banks support the toughest option — they want to see BNPL treated like a credit card.
The Consumer Action Law Centre is concerned the easy credit is causing immeasurable harm to vulnerable people like Mr Smith.
"What's happening is that at the point of sale, people are taking out credit and if they can't afford the credit, then that becomes a real problem down the track," Ms Tonkin said.
They are one of 22 groups who have put forward a joint submission to the government, as it considers how to better regulate the industry.
BNPL providers have offered support for the option of a tougher industry code, or bespoke regulation under the credit act.
In its submission, the Australian Finance Industry Association (AFIA) — the industry body which represents 90 per cent of BNPL providers — pushed back against calls for the toughest form of regulation, arguing such measures are not needed because people are not borrowing as much as they do with traditional credit products.
"The low value of the purchases made using BNPL products, and the safeguards built into BNPL products are the major reasons why full regulation under the [Credit Act] is not appropriate," the AFIA said.
It argued that under the first option, the industry could lower the threshold for affordability checks from $2,001 to $800.
The minister for financial services said the government did not want to kill off the industry.
"We want to ensure that we don't, with new regulation, smash an industry which is providing great competition," he said.
"But we do want to ensure that we've got the guardrails in place which will get the balance right between innovation, competition, credit provision and consumer protection."
'Spend it now, worry about it later'
Ray Smith said the first thing he put on Zip Pay was expenses accrued on a trip to Queensland to see his ailing father.
"He's on dialysis, he doesn't have much room. So I stayed in a hotel," he said.
He said once he had that easy line of credit, he used it to buy medical equipment, food and other items.
"I bought a sleep apnoea machine and I bought this air purifier because I have pretty bad dust and hay fever allergy … now I owe about $4,000."
So when Zip offered to increase his credit limit recently, he almost went for it.
"They offered me five grand the other day and when you're on disability pension, it's pretty tempting to go, 'Oh yeah, I'll spend it now and worry about it later'," he said.
But he was already finding it hard to keep track of the fees and repayments coming out of his bank account to pay for his Zip purchases.
"I actually knocked it back this time, because of how bad it is now already."
In a 2020 survey, ASIC found 15 per cent of BNPL users had taken out an extra loan to make their payments on time and one in five were late, or had missed, paying other bills in favour of keeping up with their BNPL payments.
"We found that one in five users reported going without, or cutting back on, essentials [like meals] to make buy now pay later repayments on time," ASIC said in its submission.
Research by the Sydney University Business School found that people who owned multiple BNPL accounts were more likely to be high-risk borrowers.
The study, which used transaction data from 800,000 people, revealed 40 per cent of people with more than one account were much more likely to show signs of financial stress.
That included missing payments, having a maxed-out credit card, being from a low socio-economic group, receiving government benefits, and using more personal loans.
However, the industry says rates of complaints and requests for hardship assistance remain very low, although it concedes some customers will feel over-extended.
Mr Smith says he needs urgent assistance but does not know where to start.
"I don't know who to get help off and I feel guilty asking for help, too, because I feel it's my responsibility," he said.
"I've got myself into this mess and so I feel bad."
But Mr Jones said it was not just up to consumers to protect themselves.
"I'd be advising Raymond to go and talk to a financial counsellor, but … there's a responsibility on the industry to ensure they're not signing up people like Raymond in his sort of situation as well," he said.
Unlike some other BNPL companies, Zip does hold a credit licence.
Asked about Mr Smith's situation, the company said it does not comment on individual customers' circumstances, but that "all customers who apply for a Zip Pay or Zip Money account undergo ID and credit checks".
"The option to apply for a Credit Limit Increase is only offered to customers who demonstrate a good repayment history," the company said in a statement.
"Customers must apply for an increase and must undergo further credit and affordability checks before any increase is made available to them."
Zip said it took its lending obligations seriously and is advocating that all BNPL products be brought under the credit act, under the government's second option for reform.
In its submission to the government, it said it already exceeded the obligations required under the AFIA BNPL Code of Conduct, but conceded that its credit assessment process was not transparent.
"Zip would, if requested, provide to ASIC our assessment process so that there is transparency on how we undertake due diligence for new applications."
