Canny View: Be weary of buy now, pay later offers

When there's not enough in the pocket for purchases - essential or otherwise - debt becomes a lot easier to justify. Photo / NZME

You know things are getting serious when housing slips down in Kiwis' priorities.

In the latest Ipsos NZ Issues Monitor, housing is at the lowest significance since September 2020. It's still second on the list, while inflation and cost of living are firmly at No.1 – up a whopping 23 per cent from October last year.

On top of that, figures from Consumer NZ's sentiment tracking indicate that 28 per cent of New Zealanders have personal debt. Just over half of this group tie this debt to personal credit cards, while 1 in 5 accumulates debt through buy now, pay later (BNPL) schemes.

This excludes mortgages – but mortgage debt is the main driver for the increase in household debt NZ has faced over the past few years. There is $300 billion of mortgage debt across New Zealand, and the arrears rates are beginning to rise as part of increasing financial hardship.

Add to that rising interest rates on loans, and inflation consistently outpacing wages ... it's hard to imagine anyone will be able to find enough spare change down the back of the couch to balance it all out.

When there's not enough in the pocket for purchases – essential or otherwise – debt becomes a lot easier to justify.

On the surface, BNPL schemes can seem like a hero service. No interest? Brilliant. So you set up your account (no background check needed) and get started spending money you don't yet have. The various companies cover goods, services, big and small-ticket items ... whatever you need.

Then payday comes around.

You still have the same pay packet and the same bills, but you now have additional payments scheduled to roll through at neat little intervals. Maybe some services will offer a one-time skip service, but most will just charge you a non-payment fee should they bounce. Over in the UK, over 40 per cent of people were reportedly taking out loans or using credit cards to cover their repayments. It's easy to get stuck in a downward spiral this way of borrowing from Peter to pay Paul – while one charges you interest, the other charges a late fee.

Rumbles of regulatory action are on the horizon, with Australia and the UK already reviewing the area. BNPL exists in a neat loophole for most legislation at the moment by virtue of not charging interest on their loans – just late fees with a serious sting, despite the attractive package they're presented in.

In previous articles, I've discussed the infamous CCCFA and its restrictive nature. Lending has decreased since then, partly due to the caution banks and traditional lenders have taken to protect themselves from huge personal fines. Even these tight regulations towards lending don't address this area, and this may explain why we're seeing that sharp increase in BNPL arrears while the amount of secured lending is down.

It's not just those using the BNPL schemes who are getting into trouble. The halcyon days of these companies during the height of the pandemic are drifting away, with issues coming to light despite predictions for growth.

One of the global BNPL giants, Klarna, recently came under fire for cutting 10 per cent of its workforce (about 700 people) by sharing a list of sacked employees on LinkedIn – reportedly to get ahead of predicted drops in consumer spending.

Nick Stewart

When the company itself is publicly signalling both a drop in revenue and a focus on short-term profitability over growth, that's probably not a good sign.

The relatively wide-open space is also getting a little crowded with companies jostling for a piece of the pie, threatening to disrupt the previous leaders. Apple just announced Apple Pay Later, and MasterCard has indicated it has a BNPL project launching this year. Paypal already has its own version. Competition is going to get fiercer as consumers are flooded with choice – much like the way Netflix is now one of many streaming services, where it was once the sole heavyweight contender.

At the same time, none of the big BNPL companies are really turning a profit. Afterpay is in the red.

Klarna went into debt in 2019 and has only dug itself deeper since. These companies were able to explode because the sector is largely unregulated, which allowed them a period of insane growth as they were so accessible to consumers.

When regulations eventually catch up and credit restrictions are applied, limiting their accessibility, will some of them still be standing?

There's an old saying about not looking a gift horse in the mouth. Well, when it comes to BNPL you should look in its mouth, look in the ears ... heck, pick up the hooves and give them a gander too. As the as long arm of the law hasn't reached this area yet, you need to go with your eyes wide open to the risks should your repayment not go as planned.

Before you tap into BNPL, make sure you have a good grasp of your situation. Does your budget have any fat to trim, like entertainment subscriptions, which could be better utilised if needed?

Regularly revisiting your expenditures and assessing your costs for cheaper deals can save you a few dollars in the long run – or at least keep you from borrowing them.

Having a good handle on your goals, timeframe and risk appetite is key to long-term success. A trusted, independent adviser can offer unbiased and evidence-based advice to help you get your financial house in order through the good times and the bad.

• Nick Stewart is a financial adviser and CEO at Stewart Group, a Hawke's Bay-based CEFEX-certified financial planning and advisory firm. Stewart Group provides personal fiduciary services, wealth management, risk insurance and KiwiSaver solutions.

• The information provided, or any opinions expressed in this article, are of a general nature only and should not be construed or relied on as a recommendation to invest in a financial product or class of financial products. You should seek financial advice specific to your circumstances from an authorised financial adviser before making any financial decisions. A disclosure statement can be obtained free of charge by calling 0800 878 961 or visit our website, www.stewartgroup.co.nz

i https://www.ipsos.com/en-nz/17th-ipsos-nz-issues-monitor-june-2022 ii https://www.consumer.org.nz/articles/consumer-nz-sentiment-tracker iii https://www.centrix.co.nz/wp-content/uploads/2022/05/Centrix-April-2022-Credit-Indicator-and-Economic-Forecast-Report.pdf iv https://www.stats.govt.nz/news/mortgages-and-other-real-estate-loans-drive-household-debt-up v https://edition.cnn.com/2022/06/08/business/buy-now-pay-later-uk-debt/index.html?utm_term=16547328881832e9bf6b2c8dc&utm_source=cnn_Nightcap+-+06.08.22&utm_medium=email&bt_ee=HXEuyGgKqtmq%2B6UWZCMEBo6mlD4YZsNyAhw%2FID7JgxuOp69KDZJ56WpG0HiDFebR&bt_ts=1654732888185 vi https://www.ft.com/content/b5b7d26c-2407-4845-8276-ef5da20f778a vii https://www.ft.com/content/ddb2e207-2450-4ca8-bad0-871290d80ea7