Why Buy Now, Pay Later needs a regulation rethink

Intro:
Welcome to CPA Australia's With Interest Podcast. Bringing you this week's need to know information for businesses and accounting professionals.

Jen Duke:
Hello, and welcome to CPA Australia's With Interest Podcast. I'm Jennifer Duke, External Affairs Lead at CPA Australia, it's Monday, the 1st of August. Afterpay, Zip, Klarna and StepPay are all examples of Buy Now Pay Later platforms, a financing product that let shoppers make a purchase upfront and pay it back over a short period of time in quick instalments. Until recently, these Buy Now Pay Later services have flown a bit under the radar in terms of regulation. They have not typically been considered credit. And so have been exempt from laws that affect credit cards and personal loans. But could this be about to change? Joining me now to discuss what is next for this sector is CPA Australia's Digital Economy Policy Lead, Dr. Jana Schmitz. Welcome Jana.

Dr Jana Schmitz:
Hi Jen.

Jen Duke:
Hi Jana. So firstly, I have to admit that I've never used a Buy Now Pay Later properly before this podcast. So I went and signed up to one of the bigger platforms for a $100 purchase, as part of my research. It was very easy and very quick. And to be honest with you, I was a little bit surprised at how fast I was approved for what to me, feels like alone. And that makes me think it might be a bit dangerous for some people. So I want to take a step back and talk to you a bit about what these services really are, and some of the issues that have prompted our discussion today. So firstly, how prevalent is the use of Buy Now Pay Later? And why do people use this service? It used to be a relatively small phenomenon kicked off by, Afterpay, but it seems now that every time I look at the news, there's a new platform being launched. Have we seen these services change over the past few years?

Dr Jana Schmitz:
Yeah, Jen, interesting. I haven't used Buy Now Pay Later services either and I'm not planning to, but by now pay is certainly on the rise in Australia and internationally as well. It's becoming more popular in the US, in the UK and in Singapore even, and in some other countries as well. But just to put it into perspective, in Australia, there are almost 6 million accounts across a variety of Buy Now Pay Later platforms. And users made an average of 16.6 transactions at an average value of 151 Australian dollars last year, so in 2021. And in the financial year of 2021 in Australia, Buy Now Pay Later services contributed a whopping 14.3 billion Australian dollars to the GDP. So that's quite a bit of money regarding the growth of the sector, we've seen as you've correctly alluded to, new players popping up like mushrooms, basically. And many of them seem to have copied the business models of Afterpay and Zip, who were pretty much the first movers in Australia, in the Buy Now Pay Later market.

Dr Jana Schmitz:
But this explosion in the popularity of Buy Now Pay Later in Australia has also seen traditional financial services firms like banks, rapidly move into the Buy Now Pay Later space. And they did that either by introducing their own Buy Now Pay Later offerings, or partnering with established Buy Now Pay Later providers. Commonwealth Bank is a good example, which holds a 5% stake in the Buy Now Pay Later platform, Klarna. What's interesting is that over the past year non-traditional players like Apple and PayPal have also announced or have actually already introduced some version of Buy Now Pay Later products. So I would say that it's definitely fair to argue that the Buy Now Pay Later market is becoming a lot more competitive, if not congested. And from the user perspective that you touched on, many are using it, so Buy Now Pay Later services to juggle their budgets, which is a development that is fueled by rising cost of living, particularly affecting those on lower incomes, unfortunately.

Jen Duke:
So I'm glad that you've raised that because often when I see Buy Now Pay Later platforms advertised, it's for things like makeup and clothes, when I'm on the internet. So how much can you actually borrow with Buy Now Pay Later and what can you actually use it for?

Dr Jana Schmitz:
So it depends on a Buy Now Pay Later provider. Some allow customers to spend very big amounts of money. So up to 30,000 Australian dollars, that must be repaid over a maximum period of 60 months. So doing the math, that's quite a bit of money that has to be repaid each month, if you actually borrow or spend $30,000 using Buy Now Pay Later. Common types of Buy Now Pay Later purchases are clothing, electronics, furniture, entertainment, appliances, and definitely cosmetics, as you said. So the list is quite long and it seems that it's getting longer, but it does depend on the type of merchant, the Buy Now Pay Later service partners with. And whilst Buy Now Pay Later was conceived as a very convenient way to purchase the well, let's call it the big ticket items, such as couches and TVs and even cars. The rising cost of living means that people are now using Buy Now Pay Later to pay for essentials, such as food.

Jen Duke:
Look, that's definitely concerning and is a general rule, I'm sort of an anti-debt person. And I think that's kind of out of the norm in Australia and a lot of the Western world, but does this sort of micro credit product encourage debt culture? And are we at risk of younger people in particular becoming too comfortable with taking on debt rather than saving?

Dr Jana Schmitz:
Yeah. So statistics show that Gen Z or Generation Z, who are those aged between 18 and 25 years and Millennials, who are approaching the 40 mark are more likely to use Buy Now Pay Later as a method of payment. I would say what makes Gen Z a natural target is that they are a demographic group that, for the first time in their lives have now, spending power. So they have their first jobs, they have opened a new bank account. And at the same time, all these retail products are being advertised to them via social media platforms like TikTok and Instagram, which are platforms heavily being used by Gen Z. I would even say that they are driven by Gen Z, pretty much.

Dr Jana Schmitz:
And in addition to that, many Gen Zs don't necessarily trust the banks as much as older generations do. So these are just some of the factors that make Buy Now Pay Later so appealing to Gen Zs and Millennials as well. And the problem is that, Buy Now Pay Later's convenience makes it extremely easy to overspend. And there's basically no stopping someone from hopping from one Buy Now Pay Later provider to another, because unlike the credit card industry, the Buy Now Pay Later industry still lacks regulatory oversight.

Jen Duke:
So theoretically, that's a lot of potential debt that a consumer could get themselves into, particularly someone who's quite young. So I'd like us now to have a bit of a chat around the regulatory framework that these platforms face and the protections afforded to consumers. Because currently, Buy Now Pay Later platforms are not considered credit products under the legislation. Can you explain to us why that's the case and are there other specific laws regulating the sector?

Dr Jana Schmitz:
So Buy Now Pay Laters are in fact licenced and regulated by ASIC, by the Australian Securities and Investments Commission. But they are not regulated under the National Credit Act. The National Credit Act requires assessments of borrower's capacity to repay loans and for licence holders to be members of the Australian Financial Complaints Authority, which provides consumers with free access to dispute resolution. So Buy Now Pay Later, currently do not fall under the National Credit Act and therefore do not have to comply with these rules and requirements that I've just outlined. The Buy Now Pay Later sector has actually opposed regulation quite heavily over the past years, arguing that the products they offer are technically not credit.

Jen Duke:
So while the sectors claiming that they're not credit, the new Financial Services Minister, Steven Jones, says they clearly are. As such, the government is planning to regulate them under credit laws by mid 2023, at least that's the signals that we are hearing. So what CPA Australia's position on regulating the sector?

Dr Jana Schmitz:
So, it basically remains to be seen what exactly government will propose or as likely to propose in 2023. Our current, or I should probably call it preliminary policy position is that, Buy Now Pay Laters should comply with rules that ensure that customers or consumers are protected, but are also able to continue to use Buy Now Pay Later. So by no means, do we support Buy Now Pay Laters to be regulated away basically. We have the view, or we hold the view that regulation should not hamper innovation. What we do suggest government does is clarifying that Buy Now Pay Later is in fact, a form of credit and the implications of using it so that, consumers can make informed decisions. And government should also ensure providers make sufficient appropriate checks about whether, consumers can actually afford to repay loans alongside with their other financial commitments and obligations. And overall, we advocate for thoughtful regulation that ensures that present players in the market, so existing Buy Now Pay Laters, but also new entrance can build responsible offerings.

Jen Duke:
While Buy Now Pay Later, isn't currently considered credit, so it isn't regulated under those laws. There is a code of practise that the majority of providers have signed up to. Why isn't this enough?

Dr Jana Schmitz:
So the industry code that you mentioned has, in our opinion, far too many gaps. It's not mandatory, and there are many Buy Now Pay Later companies that have actually not signed up to be compliant with the code. There are only vague upfront assessment processes that do not require a company to only provide loans that are affordable and suitable. And I would also add that there is virtually no consequences for breaching the code. So it does not, the code that is, does not contain sanctions that are equivalent to the credit laws. And apart from that, without proper regulation, additional risks for consumers may actually emerge such as for example, the misuse of customer data and the lack of support for vulnerable customers.

Jen Duke:
Given I've only just signed up a news one, you're making me nervous now. So from my nervous experience of using the service, it was very quick and easy. And the one that I signed up to didn't have any interest charges, which sounds really great to shoppers and to me, when I was signing up to it. But some of the groups that were pushing for these platforms to be recognised as credit products were the consumer advocacy groups. Can we talk a bit about how much trouble you can get into using these products? Like I understand there are late fees and other charges?

Dr Jana Schmitz:
Yeah. So as you correctly pointed out Jen, quite a few consumer advocacy groups, including for example, Financial Counselling Australia, CHOICE, and also the Financial Rights Legal Centre, are all advocating to have Buy Now Pay Later properly regulated. And their key argument is that Buy Now Pay Later products are currently unregulated credit products using a loophole in our credit laws to bypass basic consumer protections like assessing someone's ability to repay, for example. Buy Now Pay Later services are often advertised as interest free or 0% interest, but they do charge fees that can add up quite quickly. So they may charge consumers, a monthly account keeping fee, which is basically a fixed monthly fee up to $8 a month. And these Buy Now Pay Later platforms also charge late fees, which are the major issue. So if you miss a payment or you pay late, it'll cost you between 5 to $15 on most platforms.

Dr Jana Schmitz:
And these late fees can add up if consumers miss repayments on other platforms as well. So basically they can accrue hundreds of dollars in late fees if they are using multiple platforms and pay late or miss payments at all. What consumers should also keep in mind is that late payments can appear on your credit report and that affect your ability to borrow money in the future. So if you plan to take out a mortgage, for example, the broker or the bank in this case will most likely ask whether you've used Buy Now Pay Later, that is what happened to me recently. And so if you did use Buy Now Pay Later, it may affect the bank's decision to allow you to take out a mortgage.

Jen Duke:
Sounds like I need to go and read some fine print. Businesses are also concerned about the merchant fees that they're charged. So I believe that there's some additional fees on the business end as well. Can you sort of talk us through what that looks like?

Dr Jana Schmitz:
Yeah. So many Buy Now Pay Later providers have agreements with merchants that prevent those merchants from passing on any surcharge from Buy Now Pay Later transactions. And that means that merchants must absorb the cost of offering Buy Now Pay Later as a payment method. And the cost usually lies between 2 to 6%. That is more expensive than debit and credit card surcharges, which merchants can pass on to customers. Interestingly though, last year or late last year, the Reserve Bank of Australia, the RBA decided as part of its review of retail payment regulation, that merchants offering Buy Now Pay Later services as a payment method, are allowed to pass on the surcharge to the customers. And this promotes competition and transparency in the payment system, which will also put down what pressures on payment costs for businesses, which is good for businesses. So it's fair to say that the RBA's decision to enable merchants to pass on surcharges to customers, creates a bit of a ripple effect for credit regulation and competition.

Jen Duke:
So there's an awful lot of changes in this space. So I want to ask you a really tough question, which is, can you gaze into your crystal ball for a minute and tell me whether you think the future of Buy Now Pay Later services in Australia is going to change?

Dr Jana Schmitz:
Yeah, so I would say that the future of Buy Now Pay Later is by no means set in stone. So while regulatory change may take some time, Buy Now Pay Later providers will need to consider their Buy Now Pay Later terms. And actually, even think through whether they want to continue to rely on an exemption or preemptively obtain an Australian credit licence. And lastly, I want to add that it's always easy to point fingers at the Buy Now Pay Later companies. One of the major issues that we are facing in Australia and in other countries as well is the lack of financial literacy. So Buy Now Pay Laters, as well as other industry bodies need to do a better job to enhance consumers financial literacy. So that, they are aware of the risks that come along with certain payment services.

Jen Duke:
So this is certainly an interesting space and one we're going to have to watch closely in future, but unfortunately that's all we've got time for today. Thank you Jana, for your insights. And for our listeners, if you've got a question about any of the topics we've discussed today, any of CPA Australia's policy and advocacy work. Or you'd like to suggest a topic for, with interest, please email [email protected]. From all of us here at CPA Australia, thank you for listening.

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