In the past few years, Buy Now, Pay Later methods have started to take over from credit cards as a means to purchase without having the full amount required upfront.
Due to their popularity and performance on the ASX, brands like Afterpay and Zip have now become household names, but with an increasing amount of users and status comes a higher level of scrutiny. The sector has recently come under review by Australia’s financial watchdogs who are concerned about the long term ramifications this financial product may have on young consumers.
What does Buy Now, Pay Later mean?
Buy Now, Pay Later (BNPL) works in a similar fashion to the traditional lay-by system, where customers can secure a product and pay it off in instalments over a set period. The biggest difference between BNPL and lay-by, however, is that the customer takes possession of the item immediately, rather than after they have paid for it in full.
At present, BNPL companies offer interest-free arrangements with no sign-up fees.
Due to the success of the format, particularly with millennials who are steering away from credit card usage, BNPL has been adopted across many different industries, including fashion, beauty, homewares, holidays and entertainment outlets, with BNPL offerings also available for services such as accounting and dentistry, and even in lieu of ‘passing the plate’ at church.
What are the downsides to BNPL?
Despite not being subject to the same financial checks as a personal loan or credit card, customers are essentially being provided with a loan when using BNPL. For each Buy Now, Pay Later accounts a person has, their credit score is reduced by 50 points. For example, if you have a ZipPay and an AfterPay account, your credit score is reduced by 100 points, which in some cases can be the difference between you being approved for a home loan or not.
Failure to make payments by the due dates will incur late fees, and a further failure to pay outstanding amounts could see your debt being sold to a third party for collection. Ultimately, this could affect the individual’s credit rating.
To this end, BNPL companies have come under scrutiny for not assessing the financial viability of their customers prior to extending funds to them, and users of the BNPL system who are already in financial strife may find themselves getting further into trouble if they are not able to manage the payments. Some of these customers may even be under the legal age to apply for a loan or credit card.
What is being done to regulate the BNPL sector?
As of 1 March 2021, a new Code, drafted by the Australian Finance Industry Association, will set the standard for BNPL companies. Signatories in the sector pledge to safeguard customers by agreeing to adhere to nine different commitments relating to their products and services.
The nine commitments signatories agree to abide by are:
- We will focus on customers;
- We will be fair, honest and ethical in all our dealings;
- We will keep you informed about our product or service;
- We will make sure our BNPL product or service is suitable for you;
- We will undertake an ongoing review of the suitability of our products or services;
- We will deal fairly with complaints;
- We will offer financial hardship assistance;
- We will comply with our legal and industry obligations; and
- We will support and promote this Code.
What kinds of rules might BNPL companies need to adhere to?
Some rules include:
- capping the number of late payments that a customer can accrue;
- undertaking mandatory financial checks prior to making a purchase;
- ensuring customers are over the age of 18;
- requiring customers to make at least a partial payment before making use of the BNPL service; and
- prohibiting extra pressures to be placed upon customers already experiencing financial hardship.
Disputes arising between BNPL providers and customers will also now be administered by the Australian Financial Complaints Authority.
Customers who have a complaint should first raise it with their BNPL provider. If they are unsatisfied with the result, they can lodge a complaint with the Australian Financial Complaints Authority. Finally, if the customer does not agree with the outcome, they can refer their complaint to the BNPL Code Compliance Committee.
What penalties will BNPL companies face for non-compliance with the Code?
Misconduct or breaches of the Code may see the BNPL provider have sanctions imposed upon them by the Code Compliance Committee.
A committee under the Australian Financial Complaints Authority will also be formed and will be granted the power to “name and shame” BNPL companies that do not adhere to the guidelines set out in the Code.
For more information on how BNPL methods can affect your home loan application, speak to one of our mortgage brokers in Cairns today.