They have been touted as the next big thing for the retail landscape, freeing shoppers from the burden of interest-bearing credit cards.
But now many lenders are buying now and paying later financial problems even before the government announces its plans to regulate.
The rapid growth of small, interest-free, Buy Now Pay Later (BNPL) consumer loans has attracted a million users in New Zealand, but the massive popularity of BNPL loans hasn’t translated into massive gains.
Humm Group pulls out of the market while Zip and Laybuy cut costs and jobs to find profitability. The number of borrowers who default on payments and are plagued by late payment fees is growing.
With regulations planned around the world, the industry is trying to take matters into its own hands.
* The government is considering regulating “buy now, pay later” lenders
* Consumer: Buyers who pay $10 million in late fees that are bought now and paid later
* The buy-now-pay-later dilemma: how tightly should the latest form of consumer debt be regulated?
But it has also so far failed to lay the cornerstone of its hopes for self-regulation: the “leverage indicator,” which it said last year could be in place as early as the first three months of this year.
This indicator would flash red to alert BNPL lenders when someone applying for an account has an overdue account with another BNPL lender.
It would prevent people already not making payments from opening new BNPL accounts, but should not prevent people with multiple accounts from borrowing in one account despite being in arrears in another.
Critics say the indicator would miss more time-consuming and costly credit checks that show whether people are behind on loan or utility payments and give a more complete picture of whether they could cope with more debt.
But despite threats of government regulation mirroring moves in the UK and Australia, Michael Sadaat, vice president of global regulatory affairs at Afterpay, says the debt indicator is still a few months away.
“We’re about to go live with it. From a technological point of view, we are in the final stages of implementation,” says Saadat.
While most people can handle their BNPL loans, financial mentors say BNPL loans are given to people who cannot afford to pay them back, leaving them in financial trouble.
Saadat does not accept that smaller BNPL loans are at the root of such troubles, claiming that larger loans like auto and personal loans are the real problem.
But mentors say desperate people can throw BNPL loans on top of their already crushing debt, sending them spiraling into debt.
Jeremy Cooper, financial mentor in Auckland, is fed up with seeing struggling people get multiple BNPL loans.
One of his clients lives in assisted living and has three children.
“Total income $839 per week. Pays $150 a week rent on public housing. Existing loan repayments of $500 per week before BNPL,” he says.
She had a limit of $1,000 for one BNPL account and $1,500 for another, he says.
When the BNPL loans were added to existing auto loan debt and rent, their expenses rose to 109% of weekly income, and that was ahead of groceries, electricity, phone and other essentials, Cooper says.
BNPL should have identified her debt and refused to give her a loan, he says.
Cases like this are an exception, BNPL lenders say, but Saadat says Afterpay now expects the government to regulate the sector.
But Afterpay, like rival BNPL lender Laybuy, is calling for “proportionate” regulation so BNPL doesn’t have to change its business model to generate more revenue to cover the cost of regulation.
Regulation shouldn’t come at a cost so high that it jeopardizes BNPL’s interest-free status, argues Gary Rohloff, founder of Laybuy.
“There should be rules around credit checks and reporting, marketing, independent grievance mechanisms, and obligations to support customers in need,” says Rohloff.
This reflects plans for regulation in the UK, which has accepted that BNPL needs lighter regulation than interest-bearing loans.
The UK has three main problems:
- The inappropriate promotion of BNPL to consumers, with lenders promoting it as a payment option rather than a loan.
- Lack of affordability ratings, verification of individuals’ credit reports prior to lending, and failure to log payment information on individuals’ credit files.
- Inconsistent treatment of clients in financial difficulties.
The last is an indication of how difficult it is for people in financial difficulties to contact BNPL lenders, whose dealings are highly automated.
Jake Lilley, senior policy advisor at Fincap, says finance mentors see clients with troubled BNPL debt every day.
“We see situations where loans are made that have always been prohibitive and would always put whānau in a debt trap,” he says.
In extreme cases, people have a dozen BNPL loans.
According to Lilley, BNPL should be bound by the same “safe” lending rules for other types of lending, meaning credit checks and affordability ratings.
But Christine Liggins of Debtfix, a charity that helps people lift themselves out of debt crushing, says there is little wiggle room in the shops of BNPL lenders, who make most of their money from fees charged by shops for the Acceptance to be paid by BNPL.
After Trade and Consumer Secretary David Clark’s responsible legislative changes late last year were accused of creating an artificial credit crunch, Liggins doesn’t think the government wants to be accused of spoiling BNPL with over-regulation.
She expects easier regulation of BNPL.
This could include restrictions on how many BNPL accounts a person can have to prevent people from stacking BNPL loans on top of BNPL loans.
It could also require affordability checks for BNPL loans with higher credit limits.
There could even be some harm reduction bans, which BNPL could be used for, following an outcry over Afterpay registering bottle shops so people can buy grog from BNPL.
Afterpay will not allow its BNPL loans to be used to buy guns and gambling, but some like Laybuy would welcome regulations banning people from using it to buy alcohol, prompting Clark to remark that the move did nothing to build Afterpay’s social license.
Liggin’s assessment of BNPL’s low-margin nature appears to be borne out by its financial woes.
Australian ASX stock market financials show that BNPL’s lenders see reducing fraud losses and bad debts as key to profitability.
ASX-listed Laybuy, which has 315,000 “active” clients in Australia and New Zealand (up from 324,000 in December), has announced a “significant cost cut” will cut a third of its staff, meaning 45 layoffs, most in its Office in Auckland.
ASX-listed Zip has announced a restructuring, cutting costs, closing some overseas operations and cracking down on borrowers who have failed to pay their bills in order to achieve profitability.
There is no rescuing ASX-listed Humm Group’s New Zealand BNPL lending business, which it is closing to focus on its profitable interest-bearing retail cards.