“Spread Cheer & Payments This Xmas!” says the advertising for buy now, pay later company Laybuy. “Shop Gifts And Pay It Interest-Free Over 6 Weeks. Easy Sign Up. Easy Shopping. Easy Payments.”
Even without the excessive use of capital letters, the message coming from one of New Zealand’s largest buy now, pay later companies is clear. Being able to grab your shopping now – online or in store – but spread repayments over the next few weeks is A Good Thing.
And so it is, when all goes well. It’s like temporary free money. Like what you get with a credit card when you pay it off regularly every month, but without nosy sign-up questions from your card company, without account fees, set-up fees, or too much scrutiny of your bank account.
And we’re lovin’ it.
Laybuy has seen 150 percent year-on-year growth in 2020, says managing director Gary Rohloff. One of its competitors, Afterpay, saw Australasian sales (it doesn’t split out New Zealand) increase 115 percent in the three months to September 30, from $A1.9 billion in 2019 to $4.1 billion this year.
And those sorts of increases in 2020 come on top of a 105 percent increase in total buy now, pay later spend in New Zealand in 2018-2019, and a 49 percent increase in customers over the same period, according to New Zealand Post’s 2020 eCommerce Review.
“It’s the ‘credit’ of choice for the young,” the NZ Post report says. Forty percent of BNPL customers are under 30; 77 percent under 45. Women outspend men 3:2 in BNPL terms, and shop twice as often, but the NZ Post reports a 59 percent growth in men signing up.
Figures released by Australian financial services regulator ASIC (the Australian Securities and Investments Commission) in a report released last month show as of June last year there were around 56,000 retailers signed up to BNPL agreements and more than 6.1 million open customer accounts. Of those, 3.7 million were active accounts, up 38 percent from 2018.
In theory the 6.1 million figure would mean 30 percent of the Australian adult population had signed up with a buy now, pay later provider, although in practice serious BNPL shoppers often have accounts with more than one company.
No interest, but hefty late payment fees
Buy now, pay later companies make a lot of the fact they don’t charge interest.
“Flip interest the bird. Buy now, pay laaaater,” says advertising on Humm’s website. “The best way to live interest-free forever.”
Instead of interest, buy now, pay later firms charge late payment fees for customers who don’t meet their weekly or fortnightly deadlines. The later the payment, the higher the fee.
Financial research and comparison site Canstar.co.nz crunched some numbers for Newsroom, taking three of the biggest players in the New Zealand market – Afterpay, Laybuy and Humm.
Each scheme has a slightly different repayment schedule, but take Humm as an example. Imagine Humm customer Janine, who buys a $100 pair of shoes. She will pay $20 upfront and then $20 a fortnight over the next eight weeks.
If Janine meets every payment, it’s an excellent deal for her – an interest-free eight weeks using someone else’s money.
But each time Janine misses a fortnightly payment, Humm charges her $10, the Canstar figures show. Two payments missed: $20; four missed: $40.
The maximum fee is $75, although that’s only with Humm’s “big things” plan for purchases over $1000. For smaller purchases, Canstar shows customers won’t be charged more than $40 with any of the three providers.
Forty dollars may not seem an enormous amount, until you think of it as a percentage of the total purchase – the $100 shoes.
And then it’s huge.
Figures show most BNPL customers are like Janine, making small purchases. The average transaction across all Laybuy customers is $130, Rohloff says.
“More than 20 percent of buy now pay later users missed a payment in the last 12 months. Missed payment fee revenue for all buy now pay later providers in our review totalled over $43 million, a growth of 38 percent.” – ASIC
So how much of a problem is default? Newsroom couldn’t find the numbers for New Zealand, but the November report from Australian regulator ASIC suggest it’s a significant problem.
“While most buy now, pay later arrangements are marketed as a budgeting tool or a way to make purchases more affordable, some consumers are missing payments and incurring fees as a result,” the report says.
“Our consumer research indicated that 21 percent of buy now, pay later users who were surveyed missed a payment in the last 12 months. In the 2018–19 financial year, missed payment fee revenue for all buy now, pay later providers in our review totalled over $43 million, a growth of 38 percent compared to the previous financial year.”
Consumer New Zealand’s head of research Jessica Wilson says the big growth of BNPL schemes is a worry for vulnerable customers here too.
“They are a real trap for some consumers who can get into financial difficulties keeping up with these payments.”
Missed payment fees can build up, particularly if a shopper is using more than one buy now, pay later scheme, she says.
“In the end they can result in debt collection and a black mark on your credit record.”
BNPL fees versus credit card interest
But aren’t shoppers just as badly off with credit card purchases?
The Canstar research suggests not. It looked at how much a shopper would owe if they couldn’t or didn’t pay for their purchases under a BNPL scheme, against if they didn’t pay off their purchase on a credit card over the same period. The results are starkly in favour of interest rates over late payment fees.
Take Janine’s $100 shoes.
The Canstar numbers show Janine would have paid somewhere between 75 cents and $1.50 in credit card interest over the 5-8 weeks she wasn’t paying off her shoes, depending on what sort of credit card she had. That compares with the $10-$40 in late payment fees with buy now, pay later.
Even if she had bought something more expensive – a $1500 lounge suite, for example, Janine still mostly pays more in late payment fees than credit card interest.
Canstar figures show interest payments on a $1500 credit card payment over six weeks would be a maximum of $20, but late fees with Afterpay and Laybuy over the same six week period would be $34-$40.
It’s the same story with the 24-week payback period Humm offers its “big things” customers. Interest payments on a $1500 purchase would be around $50-$60 over the period, Canstar’s research shows, but a shopper would pay $75 in late payment fees.
Debt by any other name
Despite this, BNPL is luring customers away from credit cards.
Reserve Bank figures show credit card spending slumped during the first Covid-19 lockdown, and though it has recovered since, it still isn’t up to levels last year.
The New Zealand Post 2020 eCommerce Review says banks have a reason to be worried.
“Young shoppers are being tempted like never before with more and more BNPL brands leaping on the bandwagon. The attraction of these brands comes at a loss to credit cards.”
“Credit, loans and debt make [younger] customers nervous. BNLP is a debt or loan product which, through branding or language, gives the perception of empowerment to customers.” – Mike Burke
BNPL companies market themselves to “next generation” consumers (millennials onwards) as a way to avoid credit or debt – but actually it’s just another form of debt, says Westpac’s senior manager of digital ventures Mike Burke, quoted in the NZ Post report.
“Terminology like credit, loans and debt make these customers nervous,” Burke says. “BNLP is a debt or loan product which, through branding or language, gives the perception of empowerment to customers.”
An unregulated sector
One of the problems with buy now, pay later schemes, as opposed to credit cards, is they are pretty much unregulated, warns Canstar’s New Zealand general manager Jose George.
Lenders such as credit card providers come under considerable scrutiny under the Credit Contracts and Consumer Finance Act (CCCFA), George says. But because customers don’t pay interest with BNPL, these transactions don’t fall under the act.
Which basically means BNPL providers can pretty much charge what they like.
CCCFA basically makes it illegal for anyone lending money for personal use to make a profit from fees. Fees must be “reasonable”, the act says, which means a lender cannot charge more fees than necessary to cover costs, and even then only those costs directly related to the activity for which the fee is charged.
The law was tested in a seven year court battle between the Commerce Commission and an unfortunate motorbike finance company, which finally ended with a judgment in 2016.
After that judgment, many credit-related fees plummeted.
To take just a couple of examples: Westpac’s credit card over-the-limit fee went from $15 to $1. One dollar. Its credit card late payment fee went from $15 to $8, and there were a range of other fee reductions.
Meanwhile, BNZ slashed fees on 26 products, including dropping credit card fees by an average 45 percent.
In a Newsroom article titled “Fees fees fees” we estimated the big four Australian-owned banks could have lost upwards of $150 million a year in CCCFA-related fee reductions after the Commerce Commission versus Sportzone judgement. That was a $150 million gain for customers.
BNPL companies argue their revenue comes mostly from merchant fees, with late payments making up a small percentage (more on that later).
“They would seem to be quite unreasonable. Because there is no regulation, they can do what they want.” – Soraiya Daud
But Soraiya Daud, communications adviser for budgeting umbrella organisation FinCap, would like to see some scrutiny of whether late payment fees of $20, $40 or even $75 reflect reasonable costs to BNPL providers.
“They would seem to be quite unreasonable,” Daud says. “Because there is no regulation, they can do what they want.”
Checking for financial hardship
Fees aren’t the only things that might change if buy now, pay later schemes came under the CCCFA, Canstar’s Jose George says. Companies would have to look more carefully at whether a BNPL purchase might cause financial hardship.
“At the moment, providers don’t have to evaluate your credit worthiness. Most don’t look at your credit score. Under their terms and conditions they could, but the speed with which you can set up with a scheme suggests with most providers there is not a lot of evaluation being made of each potential customer.
“As a model, it’s about giving you access to money for purchases to make your life easier.”
Checks and balances
Laybuy managing director Gary Rohloff says his company takes issues around customer hardship seriously. It caps fees at $40 and default rates are less than 1 percent.
“Unlike some other providers operating in New Zealand, we credit check every customer when they sign up, via our integration with credit bureau Centrix,” he says. “If we suspect a customer is in financial difficulty, we will place a hold on their account to prevent them making additional purchases and finding themselves in further debt.”
Meanwhile, Afterpay told Newsroom it caps late fees at $68 or 25 percent of the purchase price, whichever is lower. And it suspends customers’ accounts as soon as they miss one payment, so they can’t rack up big debts.
“Afterpay does not report to credit rating agencies and we have never enforced a debt. If a repayment is missed, an account is suspended. There are no other consequences for a customer.”
BNPL under scrutiny in Australia
George expects regulators to start taking a closer look at BNPL providers in New Zealand, particularly given Australia’s increased scrutiny.
Regulators across the Tasman conducted a review into buy now, pay later schemes in 2018, and recently tightened up rules around the sector. A code of conduct is set to be introduced on March 1 2021, including companies committing to fees which are “reasonable at all times” and capped, and making sure customers can’t make additional purchases if they are in arrears on an existing payment.
Laybuy’s Gary Rohloff says New Zealand should follow Australia down the self-regulatory path.
“An Australian Senate inquiry on Financial Technology and Regulatory Technology, released in September, found that the BNPL sector does not require further regulation in Australia and that the sector can effectively self-regulate.
“The inquiry found that regulation could stifle innovation in non-banking technology. We agree with this position and believe the sector can effectively self-regulate in New Zealand.”
Faafoi chooses not to act
So far there has been little movement here. Former Consumer Affairs Minister Kris Faafoi took a wait and see approach when he introduced reforms of the CCCFA at the end of 2019, deciding only to include the possibility of regulating BNPL.
Consumer NZ’s Jessica Wilson says this was the wrong decision.
“We thought it would have been better, based on overseas evidence, to give consumers more protection, particularly given it is lower income or younger consumers who are more likely to take up these offers.”
“We see [BNPL deals] as credit products and think they should be regulated as such.” – Jessica Wilson
Other protections under the credit contracts act include a cooling off period where customers can extract themselves from any arrangement they realise they can’t handle, she says. And lenders have an obligation to make sure products meet a consumer’s needs and customers will be able to pay the debt.
“We see [BNPL deals] as credit products and think they should be regulated as such. Products should be fit for purpose and companies should ensure customers aren’t going to get into difficulty.”
FinCap’s Soraiya Daud agrees. Having worked with financial capability organisations in Australia, she is pretty sure it won’t be long before the sort of problems that worried Australian regulators will start emerging in New Zealand.
She wants to see the Government acting sooner rather than later to ensure BNPL schemes have to meet the same standards applied to other financial institutions lending money.
“What are their hardship practices? What do they do if people can’t pay? How do they identify if people are getting into trouble and how do they engage with people when they experience hardship? How do they come up with payment arrangements?
The new Government’s Consumer Affairs Minister David Clark says he is expecting BNPL companies to put together a New Zealand code but would consider regulation if that didn’t work.
“The Government has new powers under the Credit Contracts and Consumer Finance Act to extend legal requirements to buy now, pay later schemes, which can be used if industry-led measures are unsatisfactory,” he told Newsroom.
Both Laybuy and Afterpay told Newsroom they had financial hardship policies in place in New Zealand.
“We work hard to help our customers meet their repayment commitments, Laybuy’s Rohloff says. “This includes regular reminders. We also encourage our customers to talk early and honestly with us if they find themselves in unexpected financial difficulty.”
Afterpay says it has a dedicated team helping find options for customers who have problems paying.
“This may involve moving payment dates, waiving late fees or arranging a payment plan.”
Merchants stung with high fees
Humm spokeswoman Rebecca Emery pointed Newsroom towards the response parent company Flexigroup made after the updated ASIC report released last month.
In that response, CEO Rebecca James said only 2.3 percent of Humm’s customers were in arrears and only less than 2 percent of revenue came from late payment fees – although it wasn’t clear if that figure was the same for New Zealand.
“Over 70 percent of revenue is derived from merchant fees,” she said.
But this causes its own problems.
Retail NZ chief executive Greg Harford says many retailers are struggling with the huge rise in use of buy now, pay later schemes, because of the high merchant fees BNPL companies charged. Shops could end up paying somewhere between 4.5 percent and 5.5 percent of the sale price, if customers used buy now pay later, considerably more than for credit cards or paywave, but they felt they couldn’t refuse to sign up to a scheme or risk losing customers.
“The astronomical growth of BNPL is putting huge pressure on margins at an extraordinarily difficult time for retailers, particularly at the small end of town,” Harford says. “But increasingly shops are driven by a fear of being left behind. Customers really like it, and if your competitor is offering it, you probably have to too.”
Retail NZ has been lobbying hard about high merchant fees for credit cards and paywave, and one of Labour’s pre-election promises was to regulate merchant service fees.
Harford said he had also raised the issue of buy now, pay later fees with officials, but one of the problems was that it was hard to get good information about what fees merchants were paying.
“We will pick up that conversation next year in terms of where Government is going on fees… There is case to be made for more transparency and oversight on these fees.”
The gamification of debt
Meanwhile, Canstar’s Jose George worries about what he calls the “gamification” of debt with BNPL.
“The easier you make it to access debt, the more like a game it becomes. When BNPL is on your phone it’s catering to a demographic who often aren’t educated about money and who are used to instant gratification.”
You see a pair of shoes and you just press a few buttons.
Which is great… but also not great.
“It’s a beautiful proposition, a good product which meets a need in the simplest possible way,” George says. And for the majority of people it works really well.
“But there are no speed brakes. We need to think about the dangers of making money so accessible to people who don’t have too much financial education, and where there is no regulation at this time.”