It’s a timely reminder to be careful with your finances as we enter the silly season, with a new report revealing the financial impacts of buy now, pay later (BNPL) platforms.
The report by Financial Counselling Australia and the state and territory financial counselling associations, aptly titled ‘It’s credit, it causes harm, and we need safeguards’, is composed of surveys of financial counsellors and their clients.
The report has revealed that 61% of financial counsellor respondents said most or all their clients using BNPL platforms are struggling to meet living expenses. Their clients are now experiencing financial stress due to becoming “overcommitted” to these platforms.
A further 84% of financial counsellors surveyed said that their clients were presenting with a BNPL debt now – up from 31% just a year ago.
The results of this survey are consistent with a report from ASIC into the BNPL industry released last year, which highlighted that one in five consumers were missing repayments. In the 2018-19 financial year, missed payment fee revenue from all BNPL providers at the time totalled $43 million.
BNPL platforms have surged in popularity over the last few years, with the success of Afterpay seeing providers big and small launch their own platforms to get a piece of the BNPL pie. As more BNPL platforms continue to come into the market, the sector will continue to grow, and so will the opportunity for everyday Aussies to accrue debt.
CEO of Financial Counselling Australia, Fiona Guthrie, said: “Financial counsellors are seeing people with multiple buy now pay later debts.”
“They are really concerned that so many clients are using the product to cover essentials like food, medications and utility bills,” Ms Guthrie said.
“This is very worrying, especially as we head into Christmas which is traditionally a time of heavy spending. Buy now pay later could leave people with a financial hangover come January,” she said.
The new research from Financial Counselling Australia mirrors similar survey data discovered recently by RateCity, in which one in three respondents who use BNPL platforms to make purchases overstretched their budget and struggled to meet living expenses as a result.
The RateCity survey data also revealed more than half (57%) claimed they were more likely to impulse buy because of using BNPL platforms, with young Aussies making up most of these respondents (68% of 18-34-year-olds).
Calls for greater regulation into the BNPL sector
The survey also reported that industry hardship practices are “falling short”, with clients and financial counsellors facing significant challenges when addressing hardship with the companies that provide these products.
The report showed that 95% of financial counsellors surveyed believe that BNPL should be covered by the National Credit Code to safeguard consumers from unsafe lending.
“Financial counsellors want to ensure BNPL is a safe product for everyone. We know that many people find the product useful, but as our survey shows many people are also experiencing harm,” said Ms Guthrie.
“We are therefore calling on the Australian Government to commission an independent review of the existing legal framework, with a view to developing a fit-for-purpose regulatory response that will make BNPL safer for all users. Undertaking that review should be a priority,” she said.
Earlier this year, a new BNPL industry code of practice was put in place, which included caps on late fees, support for vulnerable customers and freezing of accounts when repayments are missed.
The code also required providers to write their terms and conditions in plain language, prominently display information about fees and send customers reminders when payments are due
However, the code did not put into place preventative measures to stop consumers from signing up to multiple platforms - a key issue identified by ASIC in a recent report into the sector.
At the time, RateCity research director, Sally Tindall, said that the code was a step in the right direction, but ultimately “it’s missing some teeth”.
“The industry has always had some good protections in place to stop customers getting on a debt treadmill with things like caps on late fees and the freezing of unpaid accounts, but the new code doesn’t force all providers to check whether their customers have debts on multiple platforms,” said Ms Tindall.
BNPL regulation a growing global concern
In the UK, governments are already investigating how to better regulate these platforms, particularly as Christmas approaches.
UK Labour MP, Stella Creasy, said of BNPL platforms: “I think politicians have consoled themselves that during the pandemic people have paid down their debts, they’ve saved more, they might be in a stronger financial position – but it’s only those people who had money to save in the first place who were in that position. And there is a growing inequality that we haven’t picked up on.”
It's a similar environment to the one currently being experienced in Australian households post-lockdowns, with the latest APRA statistics showing households have $1.20 trillion in the bank - up $108 billion from the same time last year.
So, it’s understandable that Australian-based financial counsellors are pushing for more regulation sooner rather than later.
A spokesperson for UK BNPL platform, Klarna, said in response: “UK consumers are choosing BNPL as a more responsible way to pay, saving them money and helping them manage their finances compared to alternatives like credit cards.”
“We offer short-term interest- and fee-free BNPL products with structured repayment plans, keeping people out of debt,” a spokesperson said.
RateCity tips for using BNPL platforms
It’s important to remember that just like any financial product, BNPL platforms may be a helpful tool if used responsibly. For example, if you spend wisely and budget appropriately with a credit card, you may never face an interest charge in theory.
Here are some of RateCity’s tips for managing your BNPL platforms this Christmas:
- Read your terms and conditions. Take the time to investigate what fees you may be hit with if you’re not able to meet your repayments on time. After all, if you can service all your repayments responsibly, then you may avoid most pesky fees.
- Set spending limits. While BNPL platforms typically carry spending caps, it’s worthwhile setting your own spending limits that align with your income and budget.
- Platform limiting. Also consider limiting yourself to using one BNPL platform at a time to reduce the number of cross-platform payments to juggle, and fees you may have to pay.
- Resist impulse buying. Holiday sales can be tempting but consider sitting on any major purchases for at least 24 hours to reduce the chance of impulse buying.
- Ask for help. If you find yourself in trouble or facing financial stress, reach out to the BNPL platform immediately as they should have hardship policies in place to assist.