Buy Now Pay Later?…more like, Buy Now Grieve Later!
Author: Nima Nimalachandran | National Affairs Officer
500 bucks for a bloody belt? Surely not! Your brain says no but your heart says yes. Surely one more belt wouldn’t rinse your bank account... Oh wait, that’s right – you’re a uni student, doing part time work (unpaid internships which provide you “unrivalled, industry experience”) and so you definitely don’t have enough money! But then, these eight words grab your attention. You do a double take and can’t believe what you have just read:
$500 or just 50 interest-free instalments of $10
You tell yourself that it’s just two coffees a month and before you know it, you’ve been sucked into the black hole of BNPL, falling deeper and deeper into this gaping hole of debt from which you simply can’t climb out from….
Source: M2P Fintech via Medium
BNPL services…the saviour to all your troubles?
According to Nielsen research in 2020, 65% of Australians who have used buy now, pay later payment methods are aged between 18 and 44 with 21% being 18-24 and 27% being 25-34 years old. BNPL has clearly been embraced by the younger generation with the cash-strapped youth dazzled by the lack of interest and capping fees. As traditional credit card services have more stringent credit checks and its impact on credit scores are well-known, BNPL is more desirable to the younger generation.
One of the key drivers of growth in popularity of BNPL is the effect of the global financial crisis on the perception of millennial consumers. According to the Reserve Bank, the global financial crisis was a “period of extreme financial stress” in the financial markets between 2007 and 2009, with millions of people becoming unemployed overnight. As a result, Phil Pomford, the general manager for APAC, Worldpay Merchant Solutions, contends that the financial crisis shaped how millennials perceived credit. He believes that the effect of the financial crisis resulted in “the millennial section of the community [having] a real aversion towards debt and credit.”
Some of the BNPL service providers available in Australia
Another reason for BNPL’s popularity is the budgeting assistance it offers younger people. According to Afterpay, 30% of millennials use online tools to track their spending and thus BNPL customers may feel incentivised to use BNPL services for the ease of tracking expenditure. This sentiment is supported by surveys indicating that almost 60% of Afterpay’s customers use the BNPL service to help them budget. Budgeting concerns may be eased due to their ability to spread payments across a set period of time, allowing consumers to budget accurately. BNPL providers have capitalised on this sentiment by offering more advanced budgeting tools to further attract the younger generation. For example, Klarna, a renowned BNPL provider, offers users the ability to categorise different expenses by linking its bank account to its app, hence offering a Personal Finance Management tool to seamlessly integrate its financial offering and the customer’s banking services.
The hidden financial risks of BNPL services
If there are no late fees and BNPL services provide budgeting assistance, then what’s the financial problem?
BNPL services can have a severe impact on the financial wellbeing of their customers. A recent survey undertaken by RateCity found that, amongst 1009 surveyed Australians, 28% of BNPL users face financial issues. These financial issues occur as a result of consumers taking on unsustainable amounts of debt, leading to BNPL users missing their payment. In 2020, almost 20% of Afterpay’s revenue came from late payment fees, highlighting the financial vulnerability of those using this service. Rosie Fisk, a financial counsellor, argues that consumers “go without their essential living expenses in favour of trying to pay their [BNPL provider],” reinforcing ASIC’s findings that consumers are “cutting back on essentials” and taking on another loan to make their BNPL payments on time. As a result of customers taking on loans, they may result in paying “inflated prices for some goods when using a buy now, pay later arrangement.”
“21 per cent of buy now pay later users who were surveyed missed a payment in the last 12 months”
Source: Illustration by Lee Yu Hui
BNPL usage can also have severe credit implications for their users. According to a survey from Openpay, a BNPL provider, 44% of BNPL users don’t understand how the BNPL service will impact their credit score. Despite some BNPL providers choosing not to undertake any credit checks, they are given the right to report any missed payments to credit reporting agencies. In fact, this approach is consistent with Afterpay, the largest BNPL platform in Australia. Although Afterpay does not perform any credit checks, its terms and conditions state that “Afterpay reserves the right to report any negative activity… (including late payments)… to credit reporting agencies.” However, despite these conditions set by BNPL providers, most BNPL users are unaware of the impact of the services with only 50% of users being aware of its impact on credit scores. Moreover, paying off the instalments on time is unlikely to contribute positively to one’s credit score as Afterpay is unlikely to report “positive behaviour” such as continually meeting your repayments to the credit reporting agencies.
BNPL services and mental health
Beyond the financial problems associated with BNPL services, the severe financial stresses caused by BNPL usage can further extend to negatively impacting consumers with mental health problems.
Research by the Money and Mental Health Policy Institute indicates that people with mental health problems are twice as likely to fall behind on payments for products bought using BNPL (16% compared to 7% for people without mental health problems). This could be because certain mental health problems can make it more difficult to understand complex information. Anecdotes, from consumers with mental health problems, reiterate that they are “unable to fully understand how [the BNPL service] would affect [their] situation to make the repayments,” reinforcing the need to protect vulnerable customers from signing to these services without fully understanding the credit agreement.
“It’s potentially a really serious social problem, because it’s typically young people who use these BNPL services”
Another major problem is the detrimental influence of BNPL services on the mental health of all individuals. According to Freeze Debt, debt advice and solutions app, 56% of BNPL users believe that their debt negatively impacts their mental health. The constant pressure of having to meet repayments is likely to cause dangerous repercussions, where the BNPL customers make poor decisions such as abusing drugs and alcohol. These dire consequences further contribute to the decline of one’s mental health. The likely deterioration in mental health is supported by a 2019 NAB Consumer Anxiety survey which found that 25% of consumers described their cost of living anxiety as “very high.” Having to factor in the addition of BNPL repayments to one’s weekly expenses poses the risk of compounding this financial anxiety in consumers.
Solutions for greater responsible access to BNPL services?
Greater Integration of BNPL services with Personal Finance Management tools
BNPL unnecessarily entices people into financial over-commitment with 54% of key BNPL competitors encouraging consumers to purchase products that are beyond their financial means. By integrating BNPL services with PFM tools, younger consumers are more likely to be discouraged from buying non-essential products through greater budget visibility. The integration with PFM tools will also allow customers to track the impact purchasing a specific product will have on their long term finances.
It is beneficial for BNPL providers to integrate their services with PFM tools as younger consumers prioritise transparency and clarity in finances. According to the 2019 Accenture Global Financial Services Consumer Study, students tend to lack financial literacy. Therefore, financial services platforms should be easy to understand and be informative. The survey revealed that a majority of the younger generation were seeking monthly data analytics, which categorised spending to better view where money is spent.
Source: Meld Magazine
Advocacy for Industry Reform
Currently, there are inadequate customer protection for those using BNPL services. By enforcing that all BNPL providers conduct credit checks, consumers will be prevented from purchasing products that are beyond their financial means. The mandatory credit checks have already been adopted for other forms of financial assistance under responsible lending laws.
To further protect customers, BNPL providers should be required to set fixed spending limits based on the credit capacity of a consumer. Currently, most BNPL providers base the spending limits solely on the payment history of consumers. Instead, by determining spending limits based off the credit history of a consumer, BNPL providers will be using a more accurate reflection of the customer’s financial position.
A focus on the practices of BNPL providers is very critical to avoid the younger generation being burdened by unsustainable amounts of debt. There are clear financial and non-financial consequences of using BNPL that remain hidden to most consumers. As BNPL becomes more prevalent through the growth of online shopping, it is your responsibility, as financially aware readers, to shed light on the true impact of BNPL on one’s long-term finances and protect misinformed consumers from spending beyond their financial means.