Nearly a fifth of consumers says they’ve had to compromise spending on essential items such as food in order to meet their buy now, pay later payments on time.
A new report on the emerging payments industry by the Australian Securities and Investments Commission (ASIC) has revealed 20 per cent of buy now, pay later (BNPL) users felt they had to cut back on essentials in order to meet payments.
ASIC’s report on the sector, which includes companies such as Afterpay, Klarna and Zip, also found 15 per cent of users were taking out additional credit loans in order to pay off their existing debts with a BNPL provider.
The sector is predominantly seen as an alternative to credit card use and allows customers to buy goods and services on an instalment plan over several weeks.
The corporate regulator said while the payment structure was working for the majority of customers, others are suffering harm from using the services.
“We are examining situations where consumers may be charged more by merchants for using buy now, pay later arrangements, and we are considering our regulatory options,” ASIC said in its report.
“More broadly, there are already signs that some consumers are struggling with taking on too much debt through these arrangements.”
According to ASIC, about 50 per cent of users taking on additional loans or cutting back on essentials to meet payments are under the age of 30.
The regulator also found close to 44 per cent of users were on annual incomes of less than $40,000 and were likely to not meet traditional loan requirements for credit cards.
The BNPL industry from 2018 to 2019 has experienced a 90 per cent increase in usage, with the majority of customers aged between 18 and 29. In the 2019 financial year, 32 million BNPL transactions were conducted in Australia.
Services such as Afterpay and Zip do not charge customers interest but do charge fees if payments are missed.
According to ASIC’s report, missed payments revenue had increased by more than 38 per cent compared with a year ago. However, the regulator noted missed payment fees were less than late fees charged to credit card users.
The report found 21 per cent of users had missed a payment.
The BNPL sector is not regulated by the National Credit Act, nor is it subject to ASIC’s product intervention powers.
The Australian Finance Industry Association (AFIA) has created a code of practice for the BNPL industry to ensure responsible lending and customer protection.
AFIA chief executive Diane Tate said the industry would be reviewing the findings within ASIC’s report before implementing the code in March next year.
“The BNPL industry is focused on protecting vulnerable consumers while ensuring an innovative new sector broadens consumer choice and deepens competition in the Australian financial services sector,” Ms Tate said.
“AFIA’s world first BNPL Code of Practice will play in a significant role in all these elements as the industry matures.”
ASIC said the industry would be subject to regulatory changes in October 2021, and in combination with the code, this would provide an opportunity for the sector to address consumer harm.