Buy now, pay later, lenders scramble for survival
They’ve been touted as the next big thing for the retail landscape, freeing shoppers from the burden of interest-bearing credit cards.
But now many buy now, pay later, lenders are struggling financially, even before the government announces its intention to regulate them.
The rapid growth of small, interest-free consumer loans, buy now, pay later (BNPL) has amassed a million users in New Zealand, but the massive popularity of BNPL loans has not translated into massive profits .
Humm Group pulls out of market, while Zip and Laybuy cut costs and jobs, in pursuit of profitability. The number of borrowers in arrears and stung by late fees continues to rise.
In the face of planned regulation around the world, the industry is scrambling to take matters into its own hands.
* Government considers regulating ‘buy now, pay later’ lenders
* Consumer: Buyers pay $10 million in late fees to buy now and pay later
* The buy now, pay later dilemma: How regulated should the latest form of consumer debt be?
But it has also so far failed to put in place the cornerstone of its hopes for self-regulation: the “debt indicator”, which it said last year could be in place as soon as the first three months of this year.
This indicator would flash red to alert BNPL lenders when a person applying for an account had an overdue account with another BNPL lender.
This would prevent people already in default from opening new BNPL accounts, but was not intended to prevent people with multiple accounts from borrowing from one, even if they were in arrears on another.
Critics say the indicator would be lower than longer and more expensive credit checks, which show whether people are behind on loan or utility payments, giving a fuller picture of their ability to cope. more debt.
But despite the threat of government regulation, mirroring moves in the UK and Australia, Michael Sadaat, vice president of global regulatory affairs at Afterpay, says the leverage indicator is still months away.
“We are very close to living with this. We are in the final stages of implementation from a technology perspective,” says Saadat.
While most people cope with their BNPL loans, financial mentors say that BNPL loans are given to people who cannot afford to repay them, putting them in financial difficulty.
Saadat does not accept that the BNPL’s small loans are the cause of such difficulties, saying that it is the larger loans like car and personal loans that are the real problem.
But mentors say desperate people can bundle BNPL loans on top of their already crippling debts, sending them spiraling into debt.
Jeremy Cooper, a financial mentor in Auckland, is tired of seeing struggling people able to secure multiple BNPL loans.
One of his clients is assisted and has three children.
“Total income of $839 per week. Pay $150 rent per week for social housing. The existing loan repays $500 per week before BNPL,” he says.
She had a limit of $1,000 on one BNPL account and $1,500 on another, he said.
Added to existing car loan debt and rent, the BNPL loans took her spending to 109% of her weekly income, and that was before food, electric phone and other essentials, Cooper says.
The BNPL should have identified his indebtedness and refused to lend to him, he says.
Cases like this are the exception, BNPL lenders say, but Saadat says Afterpay now expects the government to regulate the sector.
But Afterpay, like BNPL’s rival lender Laybuy, is calling for the regulation to be “proportionate” so that BNPL does not have to change its business model to generate more revenue to cover the costs of regulation.
Regulation shouldn’t come at such a high cost that it threatens BNPL’s interest-free status, says Gary Rohloff, founder of Laybuy.
“There should be rules around credit checking and reporting, marketing, independent complaint processes, and obligations to support troubled customers,” Rohloff says.
This echoes regulatory plans in the UK, which has accepted that BNPL needs lighter regulation than interest-bearing loans.
The UK has three main areas of concern:
- Improper promotion of BNPL to consumers, with lenders promoting them as a payment option rather than loans.
- Lack of affordability assessments, checking people’s credit reports before lending to them, and failing to record payment information in people’s credit files.
- Inconsistent treatment of customers in financial difficulty.
The last is a reference to the difficulty for people in financial difficulty to contact BNPL lenders, whose activities are highly automated.
Jake Lilley, senior policy adviser at Fincap, says financial mentors see clients with problematic BNPL debt every day.
“We see situations where loans are always unaffordable, and would always put Whānau in a debt trap,” he says.
In extreme cases, people have a dozen BNPL loans.
Lilley says the BNPL should be bound by the same “safe” lending rules for other types of loans, meaning credit checks and financial capability assessments.
But Christine Liggins of Debtfix, a charity that helps people get out of their crushing debts, says there is little leeway in the business of BNPL lenders, who get most of their money from fees paid by stores to accept BNPL.
After Trade and Consumer Affairs Minister David Clark’s changes to the Responsible Lending Act late last year were blamed for creating an artificial credit crunch, Liggins doesn’t think the government will want to be accused of messing up the BNPL with over-regulation.
She expects lighter regulations from the BNPL.
This could include limits on the number of BNPL accounts a person can have, preventing people from stacking one BNPL loan on top of one BNPL loan.
It could also require accessibility checks on BNPL loans with higher credit limits.
There could even be harm reduction bans on what BNPL could be used following an outcry over Afterpay listing bottle shops so people could buy grog on BNPL.
Afterpay won’t allow its BNPL loans to be used to buy guns and gambling, but some like Laybuy would be happy to see regulations prohibiting people from using it to buy alcohol, which which led Clark to say the move did nothing to bolster Afterpay’s social license. .
Liggin’s assessment of BNPL’s low-margin nature appears to be borne out by their financial difficulties.
Financial disclosure on Australia’s ASX equity market says BNPL’s lenders view reducing fraud losses and bad debt as key to profitability.
ASX-listed Laybuy, which has 315,000 “active” customers in Australia and New Zealand (down from 324,000 in December) announced that a “major cost reduction” will cut a third of staff, meaning 45 redundancies, most from its Auckland office.
ASX-listed Zip announced restructuring, cost-cutting, closure of some overseas operations and a crackdown on borrowers who failed to pay their bills, in a bid to achieve profitability .
There is no saving the New Zealand BNPL loan operation from the ASX-listed Humm Group, which is closing it to focus on its profitable interest-bearing store cards.