The rise of online shopping has boosted buy now pay later businesses during the pandemic. Photo / File
The rise of online shopping has boosted buy now pay later businesses during the pandemic. Photo / File
Allowing buy now, pay later operators to continue lending consumers up to $600 without any affordability checks would favour that sector and fail to address the risk of financial hardship to consumers, a finance industry body says.
Consultation on proposed regulation of the buy now, pay later sectoris due to close on Friday after being extended from February 24 due to the floods and Cyclone Gabrielle.
Currently buy now, pay later operators are not captured under the Credit Contracts and Consumer Finance law because they don’t charge interest, although fees are charged if the payments are not made or are late.
The Government is proposing to bring BNPL under the law with a $600 carve-out that would allow them to lend up to that level without having to undertake affordability checks.
But Lyn McMorran, chief executive of the Financial Services Federation, said the carve-out should either be expanded to include other low-cost merchant consumer credit providers or the threshold should be removed so that BNPL operators have to go through the same checks as other lenders.
“We are not in favour of anything that gives one group a competitive advantage over another.
“If buy now, pay later are able to avoid the affordability assessments then people at point of sale giving a loan of up to a $600 limit should enjoy the same freedom.”
That would include the likes of its members Smith’s City Finance, Latitude Financial and Finance Now.
Buy now, pay later operators don’t have to undertake any affordability assessments at the moment although some do credit checks which mainly consider whether a person has paid their bills and made other debt repayments on time.
Buy now, pay later has become hugely popular in recent years with the rise in online payments brought on by the Covid pandemic. But it has financial mentors worried about the level of debt people are taking on and cases where consumers have debt with multiple providers.
McMorran said the proposed regulation also did not address existing users who may already have lines of credit above $600 or multiple accounts with different providers.
“The ministry needs to consider how these existing accounts can be dealt with to ensure that they adequately address the risk of hardship to consumers. The FSF believes that at the very least the regulations need to specify that BNPL providers will need to reassess the affordability of the line of credit they offer to individual consumers as the credit runs down or when an increase in credit limit above $600 is applied for.”
McMorran said the proposed regulation was also not clear if the $600 applied to the individual borrower or to each account with a provider. She was concerned the threshold would allow consumers to get up to $600 with each of the providers.
“This greatly impacts the affordability of the line of credit and of any subsequent credit other lenders may offer.
“If a consumer was to open an account with each of the providers currently operating in New Zealand, they could have access to a maximum of $3600 worth of credit without having to go through an affordability assessment. This is a significant amount of debt to incur without BNPL providers making the correct inquiries to ensure that consumers can afford to repay without hardship.”
She said the $600 cap should only apply if it was across all providers rather than from each provider.
“This would lessen the potential for financial hardship on consumers.”
Rather than the $600 threshold McMorran said it would prefer a focus on the repayment amounts.
“A fortnightly repayment of $150 (one quarter of $600) is a significant obligation to enter into without an affordability assessment ... By focusing on repayment amounts, it would be easier to ensure the consumer will find the line of credit affordable even if their circumstances change.”
Lyn McMorran, executive director of the Financial Services Federation. Photo / Supplied
The FSF also called for BNPL default fees to be regulated and warned that if they were not the extra cost of meeting the proposed regulations could be passed on to consumers through higher fees.
The proposed regulation has already seen some entrants exit the New Zealand market.
Last month Genoapay, which is owned by ASX-listed Latitude Financial, said it would stop offering its service in New Zealand from April 11.
“... as a consequence of the uncertainty surrounding the future regulatory environment, Latitude believes now is the right time to exit the sector.”
Humm exited the New Zealand market in September last year.
McMorran was supportive of the product but doubted the industry would survive if it had to undertake affordability checks for all loans.
“The short answer is no. It is premised on the fact it is accessible and quick to get access to the funds.
“It was relatively cheap to get the funding out to people but as soon as you have to build an electronic process to gather all the information about people’s expenditure and analyse it, it becomes ridiculously expensive.”
