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Fewer purchases and lower prices: How your BNPL service is about to change

·5-min read
Here's what you need to know about finance markets for today. Source: Getty
Here's what you need to know about finance markets for today. Source: Getty

Hooray. Buy-now-pay-later (BNPL) services will finally be properly policed.

These ubiquitous play-before-you-pay products do not technically charge interest so slip through the cracks of the Consumer Credit Code.

But not any more.

New financial services minister Stephen Jones told a conference this week that they will be brought within the code’s jurisdiction and required to implement protection for consumers… by the middle of 2023.

Read more from Nicole Pedersen-McKinnon:

“If it walks like a duck and quacks like a duck, it’s a duck,” Jones said at a Responsible Lending and Borrowing Summit on Tuesday.

“So let’s have an end to the silly argument about whether BNPL is credit and get on with the next stage of growth for this emerging industry.”

He’s not kidding about growth. And therein lies the debt danger.

Conceived less than a decade ago, there are now $11.9 billion in BNPL transactions in Australia each year, across an enormous six million accounts.

With the cost-of-living crisis biting hard, a crackdown is not a moment too soon.

There will also finally be action on the predatory practices of payday lenders that are poised to pounce on struggling Aussies.

This was promised by the previous government more than 2,000 days ago – and the legislation written – but was curiously put on ice.

What needs to change

Now, some BNPL services do perform credit checks before they set you up for advances. But, because they are not yet covered by the code, they do not have to.

This also means it is currently possible to sign up, and sign up, and sign up again and again...

The amount you borrow is limited only by the provider of the service. So the lack of regulation means you could use multiple services.

With an Australian Securities and Investments Commission (ASIC) report into the sector finding one-in-five users have had to cut out essentials to meet repayments on past spending, these glaring regulatory weaknesses need to change.

For consumer safety, new rules should require:

  • Credit checks to ensure your budget is not already stretched too tight and/or you’re not struggling with debt.

  • The amount of money that can be advanced kept to a level particular customers can realistically repay. Credit cards, for example, are capped at a limit – even if this is unused – that a customer can clear within three years. Indeed, consumers must prove capacity to repay with any other debt product.

  • A limitation, probably by virtue of the above requirement, on the number of services to which a consumer can subscribe.

A by-product of moving BNPL to within the credit reporting system – for better or worse – is that consumers’ activity would be shared with credit bureaux like Experian.

From the user’s perspective, this means that being late on BNPL repayments could soon suppress your credit score.

Already for other debt products a 14-day delay is a black mark that is recorded for two years.

Non-debt products do not record defaults until 90 days. But these defaults stay on credit records, and depress scores, for five years.

What’s important to realise is that the current business model of virtually all providers is to charge retailers to offer their service... and to charge customers who fail to meet repayment deadlines.

You being late is good for them and bad for you.

And not just bad for you - it would damage your credit score.

A credit check would likely be performed when you sign up to the service, rather than every time you use it. But at least such a requirement would restrict the number of services.

What needs to change with payday lenders

What needs to change with payday lenders? 

The easier question would be: What doesn’t?

These legitimate-looking, more-appropriately-thought-of-as loan sharks, advance money when people are desperate.

Again, they are not caught by the code because they do not technically charge interest.

Yet with fees and charges, the effective interest rate can be as high as 400 per cent.

Minister Jones told the conference this week that these play-before-you’re-paid products will also be examined in the consultation process.

A joint press release issued by a clutch of consumer organisations including Choice, the Consumer Action Law Centre, Financial Counselling Australia and the Financial Rights Legal Centre welcomed the government’s commitment to implementing safeguards.

It said: “We want the government to close these gaps and protect people from harmful debts they can’t afford. Closing these gaps should also catch other unregulated credit products like wage advance and other fringe credit products that use deceptive arrangements to avoid regulation.”

The release also said the government has prioritised the implementation of payday lending reforms. This also covers consumer leases; such rent-to-buy schemes can end up costing the cash-strapped many times more than the outright cost of the item.

The consumer groups support the legislation as already drafted.

But the government will consult consumer groups, regulators and stakeholders including the industry, ahead of a plan to enact changes by July 2023.

With regulation at the moment only via a voluntary industry code, it’s high time the access to advance money is monitored and made safe.

Nicole Pedersen-McKinnon is the author of How to Get Mortgage-Free Like Me, available at www.nicolessmartmoney.com. Follow Nicole on Facebook, Twitter and Instagram.

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