ASIC report dissects buy now, pay later industry, finds one in five users struggle to meet payments

Almost 20% of buy now, pay later (BNPL) users who fail to make their payments on time end up cutting back on life’s essentials or taking out additional loans to meet their commitments, according to a widely-anticipated review by the nation’s corporate watchdog.

The Australian Securities and Investments Commission (ASIC) collated data from six BNPL providers and the ensuing report found that some of them are causing consumers financial harm beyond the post-purchase, interest-free period.

It follows an original review by ASIC in 2018 which highlighted the rapidly-growing nature of the BNPL industry; the impact of BNPL arrangements on consumer spending habits; and that financial over-commitment can be a real risk for some users.

Repayment reality

BNPL arrangements can be cheaper than other types of credit because consumers are generally not charged interest and there are limits on the fees that providers can charge. One of the most common fees incurred is for missed payments and that can spawn a financially difficult situation for some.

According to this week’s updated review, one in every five users of Afterpay (ASX: APT), BrightePay, Humm (previously known as Certegy Ezi-Pay and Oxipay), Openpay Group (ASX: OPY), Payright and Zip Pay (ASX: Z1P) fail to meet their payments despite accepting the terms of service when finalising their online purchases.

Juggling required payments with other commitments can trigger financial hardship and result in users skipping instalments on other loans and bills or cutting back on essentials (such as meals) in an effort to clear their BNPL debts.

ASIC’s research indicated that 21% of BNPL users missed a payment in the 12-month period prior to the report.

Of these, 47% were aged between 18 to 29; 39% also held a small and/or medium amount credit contract; 34% made at least six BNPL purchases in the previous six months; and 55% had used at least two different BNPL arrangements in the same period.

Of those customers who missed payments due to their BNPL use, ASIC found 44% also missed regular household bills, 32% missed credit card repayments and 22% missed their mortgage repayments.

Late payment revenue

Missed payments come with a hefty late fee – averaging $7 with most providers but as high as $12.95 with Payright – which goes straight into the coffers of BNPL companies.

And although the percentage of transactions incurring missed payment fees during the reporting period was considered to be “relatively stable”, ASIC said the growth of the BNPL user base means the number of missed payment fees incurred also continues to grow.

During the 2018 financial year, missed payment revenue accounted for over $43 million across all six companies under review and represented a 38% increase on the previous corresponding period.

Other revenue sources for the BNPL sector include merchant fees, establishment fees and account-keeping fees.

ZipMoney Payments offers a continuing credit contract where the consumer is only required to make a monthly minimum payment to avoid incurring a missed payment fee.

It works in a similar way to a credit card whereby the consumer makes only the minimum payment; however, if there is a balance remaining, they are charged an account-keeping fee.

Interest-free temptation

According to industry reports, ASIC has long been aware that some consumer age groups are increasingly reliant on BNPL services, tempted by the convenience of interest-free instalments.

In August, the regulator said it continues to receive information from individuals, consumer advocates and legal centres, which raises concerns about the platform’s role in contributing to financial hardship.

While the payment structure works for the majority of customers, it confirmed others are suffering harm from using the services.

Credit card link

ASIC’s updated review found a direct link between BNPL payment defaults and credit cards, with a “consistently higher proportion” of BNPL credit card users incurring interest charges.

“We found that between 38% and 43% of [BNPL] credit card users used over 90% of the allocated credit limit on their credit cards for each month between October 2018 and January 2019 inclusive,” the report said.

“[BNPL] credit card users continued to be more likely to have higher limit use on their credit cards in a comparison of gender and age ranges.”

Despite the link, the federal government has previously declared that BNPL providers will not be regulated under the National Credit Act as they are not classed as official credit providers and charge fees as opposed to interest.

Code of practice

In 2019, the Australian Finance Industry Association announced it intended to create an industry code of practice for BNPL providers to ensure responsible lending and customer protection.

“Industry codes can play an important role in delivering benefits to both consumers and those who are bound by and must comply with the provisions of the code to which they subscribe,” the ASIC report said.

“A robust code that is outcomes-focused, accommodates the different business models in the industry (including emerging models where possible), and has strong review and compliance mechanisms can help promote good consumer outcomes in line with community expectations.”

The code of practice will be rolled out in the new year.

ASIC retains the power to intervene in BNPL arrangements under last year’s Product Regulation Act, giving it a regulatory tool to address some consumer issues resulting from these transactions.

International regulation

Meanwhile, some countries have made moves to regulate their own BNPL space.

The UK’s Financial Conduct Authority has announced it will undertake a review of the regulation of unsecured credit, which will include unregulated BNPL arrangements offered in its jurisdiction.

The review will concentrate on how regulation can better support a healthy unsecured lending market and is expected to be finalised early next year.

Legislation passed in New Zealand last December will give that nation’s government a regulation-making power enabling it to declare BNPL arrangements as consumer credit contracts.

And earlier this year in Sweden, the E-Commerce Payments Bill was passed as a policy response to the “unnecessary debt” created by credit options such as BNPL.

Enacted in July, the bill requires BNPL providers to offer the lowest-cost direct payment options to consumers ahead of higher-cost alternative credit payment options; and prohibits providers from marketing delayed credit payment as the ‘first choice’ ahead of the lowest-cost direct payment option.