More than 6 million Australians have used the “buy now, pay later” loan service offered by Postpaid, Zip and more than a dozen other companies.
Buy Now, Pay Later offers an easy and convenient alternative to credit card services. You can apply and get your loan approved almost immediately. One reason for this is that buy-now, pay-later companies are not regulated by the same consumer protection rules that apply to other loan providers.
But now the Australian government is about to change that – at least in part, responding to concerns that the deregulated sector is driving more people into debt traps.
Federal Assistant Treasurer Stephen Jones said this week that “BNPL looks like a loan, acts like a loan, carries credit risks.”
The government will amend the National Consumer Credit Protection Act to bring the industry in line with other credit products, including buy now, pay later companies, by designating buy now, pay later companies as lenders.
Here’s what this means for you and the industry.
What is Buy Now, Pay Later?
First, let’s revisit what exactly makes buy now, pay later companies different from other types of loans.
The key difference is that buy-now, pay-later companies don’t charge interest, which is what the National Consumer Credit Protection Act defines as loan servicing. Instead, buy now, later companies charge retailers a commission on transactions and charge customers late fees if they can’t return on time. Some also charge monthly accounting fees.
This allowed buy-now, later lenders to bill their products as “interest-free,” as well as avoid the regulatory requirements of the Federal Credit Act.
One of them is the requirement to carry out a credit check, which includes an assessment of the customer’s financial history and ability to borrow money, although some buy now, later companies are already willing to do so. That’s why financial regulators such as the Australian Securities and Investments Commission warn of the dangers of buying now, pay later products that contribute to financial stress and
Additional credit verification
Changes to credit legislation will require all buy now, pay later providers to hold an Australian credit licence, like other credit providers, and to improve their dispute resolution, problem, product description and marketing practices.
Above all, it enforces credit check requirements.
A comprehensive credit-reporting framework currently requires credit providers, such as banks, to report on consumers’ credit, payment, delinquency and default history. This information is used by lenders when assessing a person’s creditworthiness and eligibility for a loan.
Postpaid and others argue that they don’t need this credit reporting system because they use their own algorithmic checks. The problem is that no one knows what data to use or how to make decisions.
While the credit reporting system isn’t perfect, it’s best to have companies with all providers working from the same data set.
Like credit services, buy-now, pay-later providers have full access to this data, which covers a consumer’s payment and problem history for other credit products, such as loans and credit cards.
This means that when you apply for a Buy Now, Pay Later loan, the process may take longer, and if you have a history of late or delinquent loan or credit card payments, you are more likely to be turned down.
However, unlike banks, the provider does not have to report your data to a credit-reporting system. That’s because the government doesn’t view them as risky as payday loans or consumer leases.
This Buy Now, Pay Later provider won’t recognize your history with other Buy Now, Pay Later providers. This means you can theoretically continue to service more, which is a contributing factor to debt stress.
Spending limits and payment limits
The new rules impose penalties for late or missed payments.
Currently, Postpaid, Zip, Hum and others have very different approaches to how they charge fees, making it difficult for customers to compare and evaluate. While the lure of “no interest” may seem attractive, these late payments can add up to a very effective rate.
For example, a study from Curtin University found that for a small purchase the result was more than ten fortnightly payments in arrears, with an effective annual interest rate of 28.25% Afterpay, 29.32% for Zip and 177.44% for Humm’s “Big Things” loan. These annual rates are higher than most credit cards.
The new cap should help bring charges in line with similar charges on other credit products.
Other changes to credit legislation mean that your credit limit cannot be increased unless you expressly ask for it. Currently, services like Zip and Afterpay start first-time users with low credit limits and automatically increase them based on good payment history.
This means that buy-now, post-paid providers offer consumers larger credit limits just like credit cards. This may be risky for some customers, but it offers high risk buy now, pay later services.
What does this mean for the industry?
High consumer expectations reduce revenue from buy now, pay suppliers later.
Limiting the ability to automatically increase credit limits means that buy-now, later companies will have to offer higher origination limits and accept higher default risks or struggle with lower transaction totals overall.
Restrictions on fees and charges may result in less revenue. More stringent credit checks may result in fewer new customers.
Bringing all providers into the regulated system allows for greater transparency in how credit decisions are made and creates a more level playing field among credit providers.
The government will now work with industry and consumer groups to clarify the details. The new laws are expected to be submitted to parliament later this year.
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