Govt decides buy now, pay later users won’t need to take affordability tests

BNPL regulations to be finalised soon, ahead of taking effect next year. Photo / Paul Taylor.

The Government is ditching plans to require buy now, pay later (BNPL) providers to check if their users can afford to repay the debt they’re after.

The Government had proposed requiring affordability tests to be done on those seeking to borrow more than $600.

However, Commerce and Consumer Affairs Minister Duncan Webb concluded this would be “too onerous” given BNPL providers only offer short-term, low-value loans.

Consumers who use BNPL products can access goods or services now, but pay for them later in a series of interest-free instalments.

BNPL providers make money by charging merchants that offer their products, and consumers who fail to meet their repayment obligations.

The Government, in October, decided to bring the increasingly popular form of credit under the Credit Contracts and Consumer Finance Act (CCCFA).

The Ministry of Business, Innovation and Employment (MBIE) launched a consultation in December. It was met with opposition from the industry, which believed it was being too heavy-handed.

Afterpay suggested the Government require BNPL providers to do affordability tests on those seeking to borrow more than $1000, rather than $600.

It made the case its product already includes features that protect vulnerable borrowers. For example, it freezes a customer’s account as soon as a payment is missed.

However, the charity, FinCap, argued BNPL lenders should have to do affordability tests regardless of how much someone wanted to borrow.

It worried people could accumulate large sums of debt, using multiple BNPL providers, without anyone checking whether they could afford it.

Nonetheless, Webb said it was important to ensure regulations were “workable and proportionate” and consumers could continue to enjoy the benefits of the product.

Speaking to the Herald, he added, he received feedback that trying to identify a debt level above which affordability tests should be done was “arbitrary”.

Webb said BNPL providers would be required to complete comprehensive credit reporting when users signed up or increased their credit limits.

Afterpay had suggested the Government exempt BNPL providers from credit reporting if they used PayWatch – an indebtedness indicator the industry developed with the credit bureau, Centrix.

PayWatch alerts BNPL providers if a new applicant has an active overdue account with another provider, provides information in real-time and captures younger adults with thin or blank traditional credit files with the credit-reporting bureaus, according to Afterpay.

However, Webb said he was uncomfortable delegating credit reporting to the BNPL sector.

“We think having good visibility of credit history, and credit owed across other providers, is a really important aspect of knowing whether a BNPL contract will cause hardship,” he said.

Webb believed traditional credit reporting would provide a “nuanced series of information”, which would strike the “right balance in terms of being low-cost, speedy, not invasive and therefore quite effective”.

He said the Government would finalise regulations for the BNPL sector soon – well before the election.

Regulations will be enforced in 2024.

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.