Financial conduct regulators around the world have been focused on the Buy Now Pay Later (BNPL) product phenomenon given its influence on consumers’ spending behaviour. The proliferation of BNPL into lifestyle and essential services has enabled frictionless access to finance— however, it has also raised challenges around protecting vulnerable consumers from harm. The willingness of BNPL providers to proactively put consumers at the centre is key to ensuring they continue to thrive without causing harm. BNPL providers can thrive by combining their digital products with proactive measures to promote sustainable budget management and debt repayments for customers.
The regulatory ‘grey zone’ of BNPL
As consumers have shifted to the digital realm during the COVID-19 pandemic, the BNPL sector has grown at an unprecedented rate.
In Australia, BNPL providers currently operate in a regulatory ‘grey zone’ with BNPL blurring the lines between being a payments method and borrowing. BNPL providers are self-regulated by a BNPL Code of Practice (the BNPL Code) developed by the Australian Finance Industry Association (AFIA) in consultation with key stakeholders.1 The BNPL Code aims to assist members with taking a consumer-centric approach and better practice industry standards. BNPL providers are also required to comply with the Design and Distribution Obligations (DDO) which require providers to ensure consumers obtain products that are likely to be consistent with their objectives, financial situation and needs.2
However, the regulatory ‘grey zone’ will not be grey for much longer. On 21 November 2022, Treasury released their options paper which considers potential models for regulation of the BNPL space for feedback by 23 December 20223.The options paper proposes three options for regulation, including (1) strengthening the existing BNPL Code with an affordability test and certain enforceable provisions; (2) limited BNPL regulation under the Credit Act, including licensing and scalable unsuitability test; and (3) regulation of BNPL under the Credit Act.
BNPL has also received recent attention from consumer groups who have raised concerns about the potential harm to consumers. More than 100 charities and Customer Advocacy groups have backed the federal government’s plans for stricter regulation of the BNPL industry with an open letter released in early May 20224. The letter calls for urgent regulation on BNPL and wage advance products as the cost-of-living surges, data has shown that users are increasingly reliant on BNPL products to pay for essential items.
Whilst a customer-centric commitment already underpins the BNPL Code and the DDO, how well are BNPL providers considering and protecting Australian consumers from harm, especially those who are vulnerable? It is important to understand the realities of how BNPL is used by consumers.
What are the consumer realities?
In the age of ‘immediate gratification’ and the rising cost of living, it is unsurprising that services offering ‘same day delivery’ and ‘buy now, pay later’ have seen unparalleled success with mass market appeal. While the concept of deferred repayment is not novel, BNPL providers have created a frictionless user experience by seamlessly integrating merchant and consumer services. Some BNPL offerings can also be more cost effective than other forms of credit. Consumers with healthy financial literacy and spending habits can benefit from the flexibility and convenience offered by BNPL as a way of effectively managing their cash flow. However, the benefits of BNPL can also lead to the product being used in ways which may put customers who are experiencing vulnerability or more susceptible to being vulnerable at risk as it reduces the psychological barrier to spending.
In 2020, ASIC reported its survey which showed that to meet BNPL payments on time, 20% of consumers cut back on essentials and 15% of consumers took out additional loans5.More recently, BNPL providers have become more omnipresent and moved towards partnerships with retailers offering essential services6. Consumer groups reported an increasing use of BNPL to pay for basic items such as groceries, utilities, and childcare. This number may rise as the cost-of-living surges and with interest rates expected to continue increasing.
Further, consumers are not limited to more than one BNPL account – however, data sharing is not mandatory despite BNPL providers having the right to report individuals to a credit reporting body7.This means BNPL providers may not always have a holistic view of a customer’s financial position when they sign up for an account. Banks may also lack confidence in offering a loan where there is evidence of BNPL accounts as they do not fully understand the customer’s financial position, potentially leading to consumers seeking funds from alternative lenders which may not suit their needs and objectives.
Where to from here?
The BNPL Code commitments and implementing DDO requirements are positive steps that BNPL providers have taken. We also expect the outcome from Treasury’s consultation on the proposed regulatory options to support with providing more clarity to address the years of debate around the adequacy of BNPL regulation.
Nevertheless, addressing the risks of BNPL will require further concerted and sustained effort by all providers. How can BNPL providers be more proactive in recognising and responding to consumers who are in (or potentially in) vulnerable circumstances? As the government looks to impose stricter regulations8, BNPL providers can start looking at their internal activities to assess:
A robust mechanism to support consumers can benefit BNPL providers in the medium to long run. BNPL providers can thrive by combining their digital products with proactive measures to promote sustainable budget management and debt repayments for customers.
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