One in five consumers using buy now, pay later miss payments, but ASIC stops short of imposing new regulation on the sector
Australia’s corporate watchdog says some consumers are having to cut back on essentials such as meals because of debt they have racked up from using buy now, pay later, warning one in five consumers are missing payments.
But the Australian Securities and Investments Commission (ASIC) has stopped short of recommending that the sector be regulated in the same way as credit card companies, despite concerns from consumer advocates that it is just another form of credit that allows people to take on too much debt.
ASIC’s long-awaited report into the industry said the total amount of credit extended in the buy now, pay later industry has almost doubled in 12 months.
The number of buy now, pay later transactions increased from 16.8 million in the 2017-18 financial year to 32 million in the financial year 2018-19, representing an increase of 90 per cent.
Missed payment fee revenue for all buy now, pay later providers that ASIC looked at grew 38 per cent to $43 million.
“While working for the majority of users, some consumers are suffering harm,” ASIC said.
“From our research, we also found that some consumers who use buy now, pay later arrangements are experiencing financial hardship, such as cutting back on or going without essentials — for example meals — or taking out additional loans, in order to make their buy now, pay later payments on time,” it added.
Of those who said they were cutting back, nearly half were under 30 years old.
Almost 70 per cent of those who had taken out another loan to make their buy now, pay later payments on time had also missed a payment, and half were under 30.
“There is also a risk that consumers may be paying inflated prices for some goods and services when using a buy now, pay later arrangement,” the report said.
ASIC’s current review considered aggregated data from six buy now, pay later providers and four major financial institutions.
The buy-now-pay-later providers ASIC reviewed were Afterpay, BrightePay, Humm, Openpay, Payright and Zip Pay.
The corporate watchdog said it also commissioned consumer research to help understand consumer behaviour and experiences with buy now, pay later arrangements.
Younger users over-represented in late fees
The report found that younger users of buy now, pay later platforms were more likely to be hit by late fees, for missing a payment.
Users under the age of 35 accounted for 61 per cent of completed transactions in the 2018-19 financial year.
For transactions that incurred missed payment fees, under 35s accounted for 67 per cent.
Some 45 per cent of transactions that incurred a late fee were hit with more than one.
Using data from financial institutions, the regulator looked at how buy now, pay later consumers used credit cards.
It found that a higher proportion of buy now, pay later users incurred monthly interest charges — on average, 26 per cent more accounts paid interest compared to other credit card users.
Buy now, pay later users were also more likely to have used over 90 per cent of their credit card limit each month, and to have higher limits than the average for their gender and age range.
Consumer advocates are particularly concerned about younger Australians taking out credit through buy now, pay later, as the Government proposes to wind back responsible lending laws.
“Taking out additional credit is concerning particularly if young people are going to have to turn to credit cards or personal loans, and responsible lending rules are to be removed,” Consumer Action Law Centre chief executive Gerard Brody said.
BNPL won’t be regulated like credit cards
The buy now, pay later providers are generally not regulated under the National Credit Act, as they are not classified as credit providers and some charge fees as opposed to interest.
But ASIC said previously announced regulatory changes were coming that would impact the industry, with the design and distribution obligations coming into effect in October 2021.
Issuers of financial products will be required to identify, in advance, what types of consumers their products are appropriate for, and “direct distribution” to that target market.
“These obligations will require the industry to design fit-for-purpose products that meet consumer needs,” ASIC said.
“They will also need to take steps to ensure their products are reaching the right consumers.”
For example, buy now, pay later providers will need to consider the proportion of late fees, and the fact some consumers struggling to make other payments, and review and change the design or distribution of their product accordingly.
Consumer Action’s Gerard Brody said the new obligations may help if they result in fewer people being stung with late fees, but he would still prefer to see responsible lending and other credit laws applied to the sector.
The industry is also developing a code of conduct, but consumer advocates have warned that self-regulation does not work.
“A self-regulatory code of conduct can only take us so far. In particular, it’s not going to cover all buy now, pay later providers, only those that voluntarily subscribe to the code,” Mr Brody said.
“We’re seeing new providers each week, yet the proposed industry code only covers eight businesses and its standards are unknown.”
He said the banking royal commission demonstrated that codes of conduct do not necessarily protect consumers in the way the community expects.
The Australian Finance Industry Association, which represents the sector, delayed the start date for the code until the beginning of March next year, as it awaited ASIC’s report and further guidance on the design and distribution obligations.
One consumer’s struggle with buy-now-pay-later service Humm
Susan Carty has faced trouble with FlexiGroup’s buy now, pay later service Humm.
The company offers credit for a range of services including home renovations, veterinary services, dental and optical care, major furniture expenses and fertility services.
In Ms Carty’s case, she did not even know that the payment plan for hearing aids she purchased for her son was through Humm.
She says she asked the salesperson at the Melbourne suburban store she purchased the hearing aid from, Bay Audio, whether they had a payment plan and they said, yes.
It was 5:30pm on a Friday and she did not read the fine print of the contract that she was signing up to, indicating it would be a payment plan via Humm.
Since she was not verbally told by the salesperson about the fees or terms of the arrangement when they signed her up, she says it was a shock when she got an email late last year asking her to pay slightly more than she expected each fortnight.
When she contacted Humm, they said it included an $8 monthly administration fee.
She says she’s still paying off the hearing aids and apart from the $8 monthly fee she has not been charged any of Humm’s various late fees because she pays each fortnight on time.
“I don’t mind paying, but what I object to is it wasn’t explained to me what it was when I signed up,” she says, adding that was the retailer’s fault.
Her view is that companies like Humm need to be regulated.
“They are giving you credit that you have to pay off,” she said.
“They should be regulated because they have systems that are obscure.
“These places can do really serious damage to vulnerable people, and that’s not right.”
Complaints resolution process took time
Ms Carty says her major problem with Humm is their processes to resolve customer complaints is difficult, took time, and its staff were “rude and unhelpful”.
Her main issue with Humm surfaced when she got a series of emails congratulating on several purchases the company said she had made at department store Myer, but which she hadn’t.
It turns out someone had hacked into her and other peoples accounts and made those purchases. But when she reported the incident, she was made to “feel like a criminal”, she says.
“I said there were four transactions on my account I didn’t make, and they said I had to make a police report, provide two forms of identification and make a statutory declaration,” she said.
“I thought was outrageous. But because I didn’t want to pay for someone else’s purchases I made a police report and got a stat dec.”
“I was banging my head against a brick wall and not getting any assistance from them whatsoever.”
To get a resolution, she decided to contact consumer groups and make a complaint to the Australian Financial Complaints Authority.
Ms Carty says up until that point she had to contact Humm through a chat service, but once an official complaint was lodged she got a call from them.
“He [Humm’s representative] told me it was my fault because of the password I had,” she said.
“Someone had hacked into the whole system and had made a lot of purchases on other people’s accounts.
“But then he said he’d take the purchases [$1,500 worth] off my account,” she said, adding Humm has since stepped up security, and now have a two-step verification process.
FlexiGroup chief executive Rebecca James said buy now, pay later finance was an “affordable and flexible financing option” for consumers.
She said while “identity theft can cause anxiety and concern” and it was unfortunate that it happened, Ms Carty’s case was resolved within four days, with AFCA confirming that the matter had been resolved when the complaint was made.
Ms James said there had “been no systematic hacking” of the company’s systems, and in the “exceptionally rare instances where a customer’s identity has been fraudulently taken over [FlexiGroup] follow best practice protocols requiring that the police be informed and a declaration from the customer as standard”.
She said the company had invested in new technology to better protect its customers.