The change is due to take effect in coming weeks, as the sector will start falling under the Credit Contracts and Consumer Finance Act. The former Labour Government decided to bring it under the law, following public consultation.
Provider Afterpay believed the change would have an immaterial impact on both its business and the bulk of its users.
Its head of international policy Michael Saadat said the rule change would give Afterpay another datapoint to use as a guardrail to prevent users from taking on debt they can’t afford to repay.
Afterpay users can buy goods or services now, but pay for them later in a series of four interest-free instalments.
Afterpay makes its money by charging merchants that offer its products, as well as borrowers who fail to meet their repayment obligations.
It charges users late fees of 25% of their purchase, up to $68.
Unlike a credit card, it also stops users from shopping once they miss a repayment.
Loan Market mortgage broker Bruce Patten welcomed the introduction of credit checks and reporting for buy now, pay later, hoping it would prompt people to treat the debt as seriously as they would other forms of debt.
He said banks treated it similarly to other loans when assessing mortgage applications.
However his observation was that many users didn’t see the money they accessed as debt.
He has to specifically ask mortgage applicants if they use products like Afterpay, because people usually fail to mention it when asked to detail what debt they have.
“It’s incredible the number of people who have Afterpay,” Patten said.
“You’d be surprised.”
Patten welcomed the tightening of rules, fearing it got people into the habit of buying stuff they couldn’t afford.
In May, 8.8% of buy now, pay later loans were in arrears, according to Centrix – a lower percentage than traditional consumer loans (9.2%).
Saadat highlighted the fact that Afterpay typically has lower limits than credit cards – starting customers off with a limit of around $600.
From July 23, existing Afterpay users will need to undergo credit checks before having their borrowing limits increased.
Saadat said this might see some Afterpay users unable to increase their limits, even if they’d made all their Afterpay repayments on time.
New Afterpay users will need to undergo a credit check before signing up. This would help determine their borrowing limit.
Saadat said it wouldn’t slow the sign-up process.
He said some users’ limits would be above, and others below, the current entry limit of $600.
Afterpay wouldn’t disclose what it believed the average new limit would be for a new user.
From August 15, Afterpay will start sharing users’ information with credit bureaux. This reporting will be done at least monthly.
While Patten believed the introduction of credit checks and reporting could have a big impact on the sector, Saadat didn’t believe it would be a game-changer.
“We have found that someone’s repayment history with Afterpay is a very strong predictor of their future repayment performance,” he said.
“That will continue to be a significant factor in how we decide what credit limit a customer should be provided with.
“It has meant that over the last several years we’ve been able to maintain very low credit losses with our customers.”
Afterpay is phasing in credit checks and scoring ahead of it becoming mandatory on September 2.
The company wouldn’t say how many users it had in New Zealand, but noted it had more than 24 million active customers worldwide.
Jenée Tibshraeny is the Herald’s Wellington Business Editor, based in the parliamentary press gallery. She specialises in government and Reserve Bank policymaking, economics and banking.
