Time to read : 5 Minutes
June 10 – an odd, insignificant date – marked the beginning of odd, significant new laws regulating Buy Now Pay Later (BNPL) services.
These are long overdue – and yet, the world-first innovation from Australia’s Afterpay, has been around more than a decade. The original concept of the BNPL model is simple and brilliant … spend money you don’t have today and repay it over time (in perhaps four equal instalments).
No interest, no credit checks, just a late fee if you don’t pay in time. But BNPL can be dangerous.
Why the crackdown was needed
The business model of most BNPL – and there are now many – is to make money by charging merchants for the privilege of allowing customers to delay-pay… and to levy fees on customers if they fail to make repayments on time.
Unlike credit cards, there is no interest. And, for that reason, the product has been falling through the cracks of our credit code.
Meanwhile, there has been huge uptake by cash-strapped consumers battling a cost-of-living crisis, leaving them exposed.
Financial Counselling Australia says Aussies have increasingly turned to BNPL to pay for essential items like food (71%), fuel (41%), utilities (32%) and general necessary purchases (93%).
Compare Club research from July last year also found that more than 30% of Aussies surveyed said they’d used BNPL to pay for essentials, such as fuel and groceries.
Where people come unstuck and suffer “harm”, found an ASIC investigation, is meeting the multiple repayments on those purchases. Its report said some users were left without enough money to live and also turning to other forms of credit to meet repayment obligations.
And a real problem arises when – as has been allowed unchecked – people are able to hold accounts with multiple BNPL providers.
They have been able to commit until their future pay is gone.
What’s the change?
The top line, big change is that BNPL will finally be brought under the National Consumer Credit Protection Act.
Providers will both need to comply with the act and hold an Australian Credit Licence, that abides with the Treasury Laws Amendment (Responsible Buy Now Pay Later and Other Measures) Bill 2024.
That could – ironically – hold both positives and negatives for users. But we will come back to that.
The other significant development is that providers are now required to be members of the Australian Financial Complaints Authority.
That means that consumers finally have somewhere to take complaints, and that there is a set procedure for those complaints to follow and recourse to the authority if people are not satisfied with the outcome.
However, let’s look at what the changes will mean before it gets to that.
What do the BNPL changes mean in practice
The fact that BNPL providers will now need to have a credit licence means that the facility will require credit checks.
This is the case for both new applications and for increases to the limits on existing accounts.
And that will help curb the exposure of where people really can’t afford it.
But there have been concessions made to the so-called low-cost credit contracts section of the act.
Providers can opt to comply with the full responsible lending obligations rules – or they can follow… well, ones that are laxer. The latter require providers to ask about income and expenditure, but not verify it.
And contracts worth less than $2,000 – most in BNPL land – need even less vetting and checking.
So what that means is consumers could still be able to open multiple BNPL accounts, which we know plays a big part in users getting into dangerous territory with debt spiralling.
And then there are – thanks to the reforms – potential longer term issues for consumers too.
Why the changes could hurt users
Firstly, every time you apply for credit with an official credit check, it is factored into the calculation of your score and could slightly suppress it.
Lots of applications could have greater impact.
But anyone who has been casual about meeting the repayments on these products needs to stop.
As companies with a credit licence, issuing credit, they have the option now to note your repayment history.
When they take that up, whether every payment has been made on time (or no more than 14 days late) will be recorded… for two years.
Again, this has the ability to significantly drive down a credit score.
Bottom line
Though the new laws are designed to protect consumers, using BNPL has just become a serious decision because it could have even more serious consequences.
You can probably still misrepresent your financial position to get approved.
You might still get approved for multiple products.
Even that, in itself, could now affect your credit score… but if you get in over your head and are late with any repayment, it definitely could.
And remember, that will affect your ability to get approved for the big stuff, like a home loan.
The new but light-touch regulation of BNPL means that – just as before – staying safe is going to largely come down to you. So just like any other purchases you may make using credit, it pays to think twice about your choices.
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Disclaimer
The information contained on this web page is of general nature only and has been prepared without taking into consideration your objectives, needs and financial situation. You should check with a financial professional before making any decisions. Any opinions expressed within an article are those of the author and do not specifically reflect the views of Compare Club Australia Pty Ltd.
