Devil will be in detail of new buy now pay later regulations, provider says

The details of new regulations for buy now pay later are still to be worked through. Photo / 123rf

The devil will be in the detail in terms of what will be required by buy now pay later companies to check whether customers can afford to take out the loans, the CEO of a New Zealand provider says.

Last week the Government announced it would bring buy now pay later under the Credit Contracts and Consumer Finance Act and introduce a cap, currently proposed at $600, over which the companies would be required to undertake affordability checks before giving the loans out.

Gary Rohloff, chief executive of Laybuy which operates in New Zealand, Australia and the UK, said he didn’t have a view on the level of the cap as yet.

“What I need to understand is the affordability checks and what is required of the sector to apply because we are in an environment in New Zealand where we are lagging the world in open banking and open banking makes affordability checking relatively easier.

“That’s why there is a need for a consultation process so that we can understand how best to comply. Because the industry generally speaking has no problem with what has been proposed.

“We are all very supportive of appropriate regulation because we all have the same goal in mind and that’s to ensure our customers are protected.”

Buy now pay later companies allow users to split payment of a transaction into multiple tranches and pay it off over a longer timeframe, usually four to six weeks. Until now it hasn’t been caught under the CCCFA because consumers don’t pay interest on it.

But those who are late making the payments or fail to pay off the item are hit by hefty fees and financial mentors have been concerned by some users getting caught in a debt cycle by the new payment products, which have seen a huge burst in popularity in recent years.

Rohloff said the average limit Laybuy gave to customers was about $250 while the average transaction was around $150.

The company did not do a lot in the over $600 space.

But what isn’t clear yet is whether the cap will apply to the individual taking out the loans across all buy now pay later providers or if it is a limit per provider or per loan.

“The devil is in the detail around what is required by the sector around affordability particularly.

“The biggest risk is we as we go through what everyone is predicting and suspects to be a pretty challenging 2023 at a macroeconomic level is to ensure we don’t put so many barriers in front of people that they can’t access affordable credit and then you go underground. And that’s not a great outcome for everybody. I’m sure there is a solution, we just need to work through it collaboratively.”

For customers who borrow under the cap, operators will also have to undertake comprehensive credit checking. This involves checking with an established credit bureau as to whether a borrower has a history of defaulting on their loans or not making utility payments on time.

Operators will also have to have an internal complaints process and belong to a dispute resolution scheme.

Rohloff said Laybuy and most other operators already had this in place.

“In terms of what is being described in the release from the minister we align to the lion’s share already. We do a comprehensive credit check on every customer. We do have a complaints resolution process in place we do have hardship policies and processes.”

Asked what extra cost the new regulations could add to doing business, Rohloff said it depended on what providers were asked to do.

“We are digital platforms, we don’t do paper. Once we understand that I will be able to give a definitive answer. The goal here is to ensure we protect consumers without adding additional friction and unwieldy process to the experience.”

Gary Rohloff is the co-founder and managing director of Laybuy. Photo / Supplied

Susan Taylor, chief executive of dispute resolution scheme Financial Services Complaints, said she wanted to better understand the reasoning behind the proposed $600 cap and how the Government had landed on that number.

“And I also would have some concerns if the $600 limit is simply per provider as opposed to all providers.”

Under the law currently, it was not able to deal with any complaints about buy now pay later relating to affordability issues but often those who ran into debt with other lenders also had buy now pay later facilities.

“... invariably where people have got into difficulties paying their loans you look at their bank statements and you see they are also paying off a number of buy now pay later products. And we hear anecdotally from financial mentors that it’s often the vulnerable consumers that are getting themselves into financial hardship with the number of buy now pay later facilities they have got and what they are using them for.”

Taylor said in some cases she had heard of people using buy now pay later to pay for groceries.

She questioned whether the cap would help if it was on a per provider basis.

“If it is per provider there are questions as to whether that’s really going to be addressing the consumer harm that we are seeing at present. There’s also a question over why they even have the $600 carve out.

“All other lenders have to apply their responsible lending rules no matter what the size of the loan may be.”

She said it appeared the government was trying to strike the balance between trying to make the products reasonably accessible for the vast majority of consumers who use it responsibly while also protecting the more vulnerable consumers.

Taylor said she expected buy now pay later operators would have to follow the same requirements for affordability checks that other lenders do for those loans over $600 or wherever the threshold might lie.

“As a minimum we normally expect to see lenders looking at a person’s bank statements for at least the last three months which then gives them a good picture of what other outgoings and commitments a person has and income as well.

“They are going to be caught by irresponsible lending laws they have got to carry out some process to satisfy themselves that the person is going to be able to repay the facility without suffering substantial hardship.”

That was likely to take longer than the 10 minutes - the current timeframe many providers currently offer to be able to approve the product in.

Taylor said the providers would have to do a cost-benefit analysis and decide whether it was viable to offer the loans above the cap.

“It’s going to be quite a tricky balancing exercise.”

Taylor said it was pleasing to see that the providers would be required to be members of a dispute resolution scheme.

“With economic times as they are and as more people may have trouble meeting their financial commitments having access to dispute resolution is very important.”

The Ministry of Business, Innovation and Employment is expected to begin consultation on the regulations before the end of the year with the regulations finalised and brought into place in 2023.