Buy now pay later is hugely popular with consumers but it faces regulation and an economic slowdown. Photo / File
“I’ll have to decide between these two pairs of jeans because I can’t afford to get them both,” I told the shop assistant. But you can, she said. Why don’t you put it on Afterpay?
I didn’t sign up, but thousands of New Zealanders have since the ability to
A 2021 report by Finder found that more than 30 per cent of Kiwis have used the service in the past three years. That rose to 44 per cent for millennials and 52 per cent for generation Z. Younger shoppers, particularly women, were signing up in droves to buy clothes and shoes - forgoing more traditional forms of credit such as credit cards.
But seven years on, financial mentoring service FinCap is reporting that a rising number of Kiwis in debt also have BNPL credit and the sector is set to be regulated. On top of that, tougher economic times have led to a slowdown in spending and the numbers of people signing on to use the services.
Two BNPL operators have already got out of the New Zealand market - Humm and Genoapay - and a third, Openpay, has gone bust. Submissions closed on March 10 on consultation to regulate the sector, which proposes bringing it under the Credit Contracts and Consumer Finance Act but with a $600 exemption. All credit above that would require an affordability assessment.
Currently, BNPL is not considered to be credit because it doesn’t charge interest, although there are fees if payments are defaulted on or not made.
Jake Lilley, head of policy at FinCap, says the regulation is important because it will close a loophole in New Zealand’s lending laws that has allowed some Kiwis to get into significant financial strife by taking on debt they can’t afford, forcing them to go without food or other necessities as they pay off a buy now, pay later debt instead.
“Unfortunately we are seeing a lot of that and it’s causing a lot of frustration for financial mentors and the whanau they are working with.”
But he isn’t keen on the $600 cap, which would allow credit to be extended for smaller amounts without affordability checks.
“We just don’t see it as being workable.”
It’s not clear if the cap is per person or per lender. Lilley says if it was based on each lender, a consumer could easily rack up $2400 in debt without having to go through any proper checks.
Instead, Lilley wants to see affordability checks applied from the first dollar borrowed.
“Our argument is, this is a loophole, it needs to be closed and proper credit protection needs to be put in place from zero up. Although that comes with time and resources, it’s the only way to stop a significant debt spiral, which is a lot more harmful.”
Gemma Rasmussen, head of research and advocacy at Consumer New Zealand, sits in more neutral territory, knowing the product is hugely popular with many consumers.
“A lot of countries are trying to figure out what is an appropriate level of regulation. And one of the hard things about BNPL is that for a large proportion of users it works really well. They make a purchase, they split up those payments, it’s a great alternative to a credit card. They are not having to pay interest or annual fees or anything like that and we know with the regulation of interchange fees coming in, the utility for credit card reward offerings has completely declined so it puts BNPL in a really attractive place.”
She knows a small proportion of users get into financial difficulty using the product, but says there needs to be a balance between protecting those consumers and not over-regulating so that BNPL providers leave the market.
“We don’t think there should be a threshold because it fails to take into consideration individual circumstances. We think that a lighter affordability test would probably be a good solution. Something that wouldn’t be extremely resource intensive and costly.”
But Rasmussen doesn’t know what that would look like and says more consultation would be needed to work it out.
Consumer NZ would also like to see BNPL rules extended to include other forms of short-term interest-free credit such as mobile phone payment plans. This would align it with the UK’s proposed regulation.
“We have expressed concern about the fact consumers are often persuaded to purchase expensive mobile phones on contracts they pay off over several years. Like BNPL, these phones are sold without conducting affordability assessments and if repayments aren’t made on time the credit provider can charge late payment fees. In our view, these types of arrangements should be treated the same as BNPL.”
However, Consumer says some types of interest-free credit such as community-based and social service credit should not be included.
The proposed $600 cap has also drawn a strong response from other lenders.
Lyn McMorran, chief executive of the Financial Services Federation, which represents non-bank financial institutions, 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,” said McMorran.
“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 Finance and Finance Now.
The banking sector has made a similar call. In its submission on the proposed regulation, the NZ Bankers Association said all BNPL inquiries should have to comply with the credit law’s affordability principle.
“There is no clear justification for treating BNPL contracts differently to other consumer credit contracts.”
The NZBA (New Zealand Banking Association) said if the Ministry of Business, Innovation and Employment considered it necessary to have a monetary threshold, then $600 was too high.
“We understand that many BNPL consumers borrow at amounts less than $600, yet still suffer harm. A lower threshold would bring more BNPL contracts within the scope of the affordability assessment and provide better protection for more consumers.”
The Banking Association also pointed out that the regulations did not address consumers having multiple loans with different providers.
Afterpay is the largest provider of BNPL in New Zealand. It was acquired by US financial services firm Block in January last year but remains ASX-listed. The Herald asked for a copy of its submission and for an interview with the company to talk about the future of BNPL.
But its spokesman said it planned to do briefings when its submission was made public and declined to offer anyone to speak to the Herald, pointing instead to its recent shareholder letter.
This month the Australian Financial Review reported Block’s chief financial officer Amrita Ahuja as saying its product was “working capital”, not credit.
“It is important to recognise this is a unique product: it is not a 30-year mortgage or a car or student loan.
“It is effectively working capital for many of our customers. The typical loan sizes are relatively small and typically pay off in a month or so.”
A spokesman for Kiwi buy now, pay later operator Laybuy said it was part of a joint submission put forward by the sector, which responded to the Government’s proposed regulation but also didn’t want to discuss its views publicly yet.
“We want to give officials and ministers the opportunity to consider the submission in detail and will be guided by them as to when it will be publicly released.”
Laybuy, which delisted from the ASX yesterday after its share price took a battering, is undertaking a second round of restructuring in its business and is focused on becoming profitable after struggling to raise capital to continue growth.
Managing director Gary Rohloff says he strongly supports regulation of BNPL and agrees that it is needed to better protect vulnerable consumers.
“We believe that a well-designed regulatory framework, which recognises the unique features of BNPL, could actually support the sector by providing a level playing field and enshrining the benefits while also providing consumers enhanced protection.”
Rohloff says most governments, including New Zealand’s, recognise the unique features of BNPL and are advancing bespoke regulation that sets minimum standards for BNPL providers but also supports continued innovation in the sector.
“While we are continuing to work with the Government on the details of the proposed regulatory framework, we are largely supportive of the work that is under way and remain confident that it should not have a significant impact on our operations.
“This is because we already undertake a number of steps that will be required under the new regulation, including credit checking every new customer, utilise the services of an independent debt resolution agency and have a robust hardship policy.
“We do not anticipate the introduction of regulation into New Zealand as proposed in the recently released discussion document to have a significant impact on the BNPL sector.”
But others are not so convinced. Jarden analyst Elise Kennedy says the future looks increasingly hard and believes BNPL as a product wouldn’t have existed in a higher interest rate environment.
“If you are costing and charging and taking a rate of between 3 to 6 per cent from the merchant and your interest rates are that, then where do you take out the HR, the marketing and everything else you have from?”
She says BNPL’s future will depend on how much the merchant is willing to pay and where interest rates end up.
Kennedy believes regulation of the sector is inevitable.
“There was a bit of a land grab of customers and now more recently they have already started to see a more material slowdown in active subscribers or customers because they have started to regulate themselves.”
Consolidation was expected but had happened a lot faster than many thought possible. Block buying Afterpay was an example of that.
But Kennedy says buyouts are also challenged by the fact that companies buying rivals may not gain much in the way of new customers, as many BNPL customers use multiple providers.
Things have also got much harder for start-ups, with venture capital drying up significantly, Kennedy adds. “That enables the big to get bigger.”
But she believes survival is likely to rely on BNPL operators expanding to offer other services, as Block/Afterpay are already doing.
Alex Sims, associate professor in the Department of Commercial Law at the University of Auckland Business School, predicts that regulation will mean fewer operators.
“We have already seen the number decline, I think they will decline further.
But she doesn’t believe the sector will disappear. “There will still be some.”
“But it won’t be this high growth, pulling in money left right and centre product.”
'Debt becomes more like a rent payment that people get so used to paying.'