Here's why buy now pay later services need to be regulated

Buy now, pay later schemes must be brought into the National Consumer Credit Protection Act. Picture: Shutterstock
Buy now, pay later schemes must be brought into the National Consumer Credit Protection Act. Picture: Shutterstock

This government is so keen to unleash an economic recovery, it forgets there are some people being left behind.

That's the kindest construction I can possibly put on its decision to roll back disaster payments when and if we all get to 80 per cent vaccinated. That decision will push more and more people into poverty, perhaps starvation in this enormously wealthy country.

Think that's an exaggeration? Australians are already buying food on the modern version of lay-by. That's the devastating news from Financial Counselling Australia which says its counsellors are seeing people whose only way of buying food at the supermarket is to use buy now pay later services (BNPL). You can't turn up at the checkout but you can buy giftcards through BNPL for nearly all the major supermarkets or use one of their cards on Apple Pay. Buy for yourself or send to a friend, touts one of the major BNPL companies of giftcards.

It's an area of credit which has so far escaped any of the regular credit regulations.

Financial counsellors are now seeing an influx of clients who cannot afford to repay their BNPL accounts.

It's an area of credit which has so far escaped any of the regular credit regulations. Mind you, Josh Frydenberg has desperately tried to roll back our protections, including the ones St Kenneth of the Hayne Royal Commission said we urgently needed to protect us from usurers. Last year, Frydenberg said those protections were "unnecessary barriers to accessing credit". This is the same bloke who is now telling banks to get tougher on lending for mortgages.

But it is urgent that buy now, pay later is regulated. Financial Counselling Australia's BNPL policy advisor James Sleep says the organisation is already receiving reports of clients whose only option to put food on the table is to use buy now, pay later at the supermarket. There are also reports of BNPL being used to access mental health supports.

FCA sees people whose lives are being torn apart by debt, thousands of people each year and it will soon reveal the full results from a September survey of just over 200 financial counsellors. The news is never good but preliminary results of the survey show there's new debt on the block. Three-quarters of FCA's financial counsellors surveyed said that in their current casework, about half or most of their clients had BNPL debts.

A year ago, that same proportion was just 28 per cent. It's just about tripled in 12 months. A majority of counsellors say BNPL debts cause most or all of their clients to struggle with other living expenses; and 94 per cent of financial counsellors said that BNPL should be regulated by the National Credit Code.

These results will form the basis of the FCA's report to be released in October which aims to raise the alarm bell about BNPL in Canberra.

So why is BNPL off the hook? Why is there so little scrutiny?

Gerard Brody, chief executive officer of the Consumer Law Action Centre, says politicians are always distracted by bright, shiny things.

"There is a perception that BNPL is an innovation, a fintech. Our policy makers don't want to inhibit business and they want to bring competition to the big banks.

"That's misguided."

Not sure what part of lending money to those who can't pay it back is an innovation. Banks have been doing that for years, only halted by Hayne.

Brody is clearcut on this: "They aren't innovative. They are loans on an app and they don't bring new value to the market and to consumers."

A majority of buy now, pay later schemes have signed up to self-regulation but even that is voluntary. Haha. Banks, which have to deal with some scrutiny, signed up to the Banking Code of Practice, don't comply with all the rules. Why would you expect those utterly without rules to do the right thing?

Buy now, pay later schemes must be brought into the National Consumer Credit Protection Act in an attempt to make sure these companies take their consumer responsibilities seriously. This would mean clients could take their complaints to the financial ombudsman, the Australian Financial Complaints Authority. It would also force buy now, pay later companies to have to deal with those clients who explain they are experiencing financial hardship. Right now, BNPL's response to those who are struggling is to slug them with late fees.

And there needs to be some real structure imposed on how late payment fees work and why they are imposed. If BNPL is lending money to anyone over 18, there should be proper checks to ensure those people can actually pay the money back. We have new laws coming into effect this month which mean that financial institutions are meant to know who their target markets are and know what they can afford to pay. Those laws are called the Design and Distribution Obligations. But if BNPL is applying a whole bunch of late payment fees, clearly it didn't consider applicants' ability to pay. Late fees can't be built in, the way that they are. The Australian Securities and Investments Commission released research late last year which showed one in five users of BNPL services paid late fees at some time. That tells me, in a rough kind of way, that one in five users did not sign up to a scheme which suited them.

Financial Counselling Australia and the Consumer Action Law both want to see changes to protect consumers. We should all want that too. If the federal government recognises there is a problem with the amount of debt we are all getting into to buy homes, surely they can also see a risk to consumers who are buying small. Personal loans are a big part of the Australian economy and borrowers should be afforded protections.

And in the meantime, the government needs to understand just how deplorable it is that people are forced to put food on the table through lay-by. Groups like FCA and CALC fought hard to get the government to regulate payday lenders. It took years to get consumer protections in place. It looks like the same story is getting played out with BNPL.

And this is happening now. Just wait until COVID support payments disappear.

  • Jenna Price is a visiting fellow at the Australian National University and a reglar columnist.