Buy now pay later preys on the poorest consumers

The perils of paying later

The benefits of buy now pay later were clear for Laura, a mother of two.

"It’s really nice to be able to able to get the things that you can’t afford to buy at the time,” she told Consumer NZ. “That’s what really drew me in to BNPL."

BNPL provides customers with access to interest-free credit that can increase their ability to find good deals by spreading costs, or ride out short-term economic shocks – like having to replace a broken fridge – without using credit cards or payday lenders.

Laura used BNPL because of the “whole process of the easy credit check when you apply on those BNPL apps – it’s easier than getting a credit card”.

It also gives more people – including those who would be rejected for other financial products such as credit cards – an element of financial flexibility that can be useful in managing household finances.

“But by the end,” Laura said, “it was a struggle.”

Laura started using BNPL to buy birthday gifts for family, but it soon became a necessary financial tool.

“There were times when I really needed it to buy warm clothes for my children during the winter … I couldn’t really buy it with the whole amount because they’re quite expensive and with two kids, it adds up.”

Before long, Laura was using the service for purchases even when she didn’t need to.

“I got out of hand purchasing things on BNPL. Even tiny things that cost $10 that I could pay for upfront, I still put on BNPL because then I’d only have to spend $2 in the moment.”

Being able to access a product or service immediately and worry about paying for it in the future was something Laura described as “really addictive”.

“I was putting everything on Afterpay, Laybuy, Humm. Any time I could pay weekly or fortnightly, I’d put it on the app.”

She questioned why she wasn’t being declined for these services but learned that these services allow you to start small before increasing the credit limit, “and that made it more addictive”.

Her lifestyle had become financially unsustainable but her BNPL providers didn’t seem to mind, as long as she kept making repayments. And, in turn, her credit limit was extended.

When she ran into a short-term financial shortfall and couldn’t make a repayment, Laura says that the BNPL providers paused her services, but often this simply led her to move to another BNPL provider.

“If I had a problem with Afterpay and I couldn’t use it, my Laybuy was still good so I could use that … I felt like I was being really smart with it.”

While Laura felt smart at the time, she knows now that she was simply deepening her financial obligations to these lenders and getting further and further in debt.

“I told myself I would never be in debt, that I would never put myself in that position. But with kids, rent and daily living expenses, I fell into a situation where I needed to use BNPL. I couldn’t stop thinking about it and I was thinking about it a lot at night.”

Cost of living crisis hits ability to repay

Consumers are more dependent on BNPL and less able to consistently make repayments. Arrears are rising as a result, with debt advisory services increasingly helping individuals to deal with problems associated with BNPL. And this is hitting NZ’s most vulnerable households the hardest.

Source: Centrix, 2022

The proportion of BNPL users in arrears has risen throughout 2022. Credit bureau Centrix’s October Credit Indicator reports that 9.0% of consumers with BNPL debt are currently in arrears, a 2.7% increase on the level of January 2022. August and September represent the highest rate of arrears since Centrix began collecting data on BNPL arrears in March 2019.

This graph might not illustrate the full scale of the issue, with consumers simply shifting BNPL debt onto credit cards. In July 2022, Consumer NZ’s Sentiment Tracker showed that 22% of BNPL users made repayments using credit cards. When this happens, consumers not only forfeit the interest-free benefits that BNPL offers, but they risk rolling the BNPL loan into credit card debt which will affect their credit score in future.

In the last year, cost of living pressures have really amplified, and there are many households who were making ends meet that have now been squeezed into a more vulnerable financial position, said Gemma Rasmussen, Consumer’s head of campaigns and communications.

“It’s easy to understand the appeal of BNPL. That said, there is strong evidence that for many under financial strain, payments are often snowballing and a negative debt cycle is deepened.

“We understand that for many BNPL users, this is a system that works and enables them to effectively budget, but there needs to be systems in place to ensure that lending is responsible, because let’s identify this product for what it is. It’s credit.”

Poor households punished by BNPL

New Zealand’s least-wealthy households are not only the most dependent on BNPL, they are also the most likely to be hit by late payment fees which exacerbate their financial problems. This worries Laura.

“I think a lot of people are struggling and that’s why they’re using these services, but then you’re putting yourself in a position where you’re struggling even more.”

And BNPL is an increasingly frequent problem, according to Natalie Vincent, the Chief Executive of Ngā Tāngata Microfinance. This non-profit organisation focuses on helping financially vulnerable New Zealanders to recover from financial hardship.

Ngā Tāngata has seen “an increase in people who present to us for support with unmanageable debt and an increasing number that have layered BNPL debt on top of other debts that they already have”, she said.

Data provided to Consumer by Ngā Tāngata Microfinance shows that in 2021, 32% of people approaching the organisation had BNPL debt, a figure that has risen to 41% in 2022 so far and one that has been trending upwards over the past year.

Source: Ngā Tāngata Microfinance, 2022

And these problems disproportionately affect New Zealand’s most financially vulnerable households, which are both dependent on the services and lacking the income and financial stability to maintain repayments.

Consumer’s Banking Satisfaction Survey shows that the use of BNPL services for purchases in which consumers didn’t have the funds to pay all at once is strongly linked to income, with less wealthy households more likely to use these services when they can’t afford an upfront cost.

Source: Consumer NZ Banking Satisfaction Survey 2022

This is not just poor financial discipline. The less wealthy your household is, the more likely you are to have used BNPL to have purchased items essential to day-to-day life; 50% of households with incomes below $50,000 have resorted to the use of BNPL for essential products, a figure which falls to 29% among the wealthiest households.

Source: Consumer NZ Banking Satisfaction Survey 2022

The inevitable result is that New Zealand’s most financially vulnerable consumers are the most likely to be hit by late or missed payment fees. According to our data, 25% of households with incomes under $50,000 have been charged late or missed payment fees more than three times. This figure falls to 20% among those earning $50,000 to $75,000, and between 0% and 7% among households earning more than $75,000.

Source: Consumer NZ Banking Satisfaction Survey 2022

“Supporters of buy now pay later assert that it can boost financial inclusion by helping those who would otherwise be unable to access credit,” Rasmussen said.

“While buy now pay later users are able to enjoy the perks of interest-free credit, Consumer’s data shows those households are significantly more likely to find themselves paying late payment fees.

“It’s undisputed that buy now pay later provides a range of benefits for most users. But the most vulnerable households are negatively impacted by a lack of protection, not to mention the barrage of marketing messages to spend more."

The case for affordability checks

So what action would Laura have liked to see the BNPL providers take when she ran into difficulty?

“It would have been nice if they could have linked up all my BNPL accounts. If they saw I was struggling to pay my Afterpay, they could have linked up Laybuy and Zip and let them know I’m struggling, and not to let me use them again.”

Laura’s answer sounds a lot like a form of affordability or credit checking, and the pattern of behaviour Laura describes in relation to BNPL is exactly what credit checks are designed to identify and prevent – both to protect businesses and consumers. While Laura was dependent on BNPL for essentials, she was also being allowed to use it in ways that harmed her financially.

At present, Laybuy, Zip, Genoapay and Klarna perform credit checks on first-time users, while Openpay performs a credit check depending on your purchase amount. Afterpay, which accounts for about 40% of the BNPL market in New Zealand, does not perform credit checks. Instead, it sets individuals small credit limits which are extended as they demonstrate their ability to make repayments.

Credit checks pick up on things like missed payments, insolvency, debt collections, and hardship applications among a range of other factors. They identify if you've had problems repaying credit in the past but cannot gauge how much you might be able to pay back in the future because they do not include an affordability assessment. These assessments are required when applying for other forms of credit, such as a personal loan or credit card, but not when applying for BNPL.

In November 2021, the Ministry of Business, Innovation & Employment (MBIE) launched a consultation on BNPL in response to concerns that the product could lead to financial hardship. Similar concerns had been raised in Australia and the United Kingdom.

All of the country’s BNPL services apart from Klarna and Genoapay made a collective submission advocating for self-regulation. The submission announced the development of an ‘indebtedness indicator’ supported by credit bureau Centrix.

“Once live, each BNPL participant accessing the Centrix service will be alerted if a new account applicant has an active overdue account with another BNPL participating provider,” the submission said.

The indicator, launched toward the end of 2021, creates greater oversight of an individual’s overall financial position in relation to BNPL debt, while approaching a real-time indication of someone’s indebtedness with a provider.

Monika Lacey, Centrix’s chief commercial officer, said: “Laybuy and Zip currently participate on the indebtedness indicator, with Afterpay about to go live.”

While the indicator limits the ability of already indebted individuals to take on more debt, it does not address the issue of the affordability of BNPL loans or prevent the problem developing in the first place. As a result, significant risks remain for consumers, who can still gain access to more credit than they can afford.

“Because there’s been no affordability assessment done, you might start off with a $200 credit limit and that will get extended over time because you’ve paid it off,” said Ngā Tāngata’s Natalie Vincent.

“Then you subscribe to another BNPL provider because there’s no limit on how many you have and no cross-checking unless you’re already indebted. Before you know it, you’ve got a $1000 line of credit you’d never have access to from a bank, because with rigorous affordability assessments the bank would know you couldn’t afford it.”

With Centrix prevented from collecting information on an individual’s income by the Credit Reporting Privacy Code, Lacey said: “All we know is that someone is in arrears today with a BNPL provider.”

So is it fair to say that the indebtedness indicator can only identify a problem once it’s already happened?

“Yes. Correct.”

What to do if you can’t make repayments

It can be tempting to put your head in the sand when your finances get away on you. However, the first thing you should do if you’re struggling to make repayments is get in touch with your BNPL provider.

Before contacting your BNPL provider, Ngā Tāngata Microfinance recommends taking stock of all of your debts so that your provider understands your wider financial situation, and to prepare for the call with a friend or support person before you get in touch.

When speaking to your BNPL provider, ask them to suspend your BNPL account so that you can prevent further spending while you get on top of your debt, and ask for your credit limit to be reduced to help you gain control over your finances.

Finally, don’t be tempted to take out a high-interest debt in order to pay off your credit.

Each of the BNPL providers has a hardship page on its website:

• Afterpay hardship page
• Laybuy financial hardship and assistance page
• Zip financial difficulty and hardship page
• Applying for financial assistance with Genoapay
• Openpay hardship policy
• Klarna ‘Experiencing hardship?’ page

On these pages, the BNPL providers detail reasons why you might not be able to make your repayments, including anything from a change in employment to the end of a relationship, detailing solutions they can offer to help. These can include moving payment dates, waiving late fees or arranging payment plans. If your provider does not agree to suspend your payments or waive late fees, you cannot afford the terms of a new payment plan, or you are in debt with multiple BNPL providers, there may be other organisations that can help.

• MoneyTalks is a helpline service with resources to help make your money go further. Go here to find a local financial mentor to help find a way out of debt.
  
• Christians Against Poverty (CAP) also run a free debt help service. They will tailor a budget and a plan for you, and they will also negotiate with creditors and advocate for you in order to get as much interest and unfair fees written off as possible.
  
• Ngā Tāngata Microfinance is a microfinance organisation which offers “fairer, kinder, interest-free loans” to New Zealanders with unmanageable debt as well as financial mentorship. Ngā Tāngata Microfinance will lend up to $3000 to pay off high-interest debt, which can be paid off over two years.
  

Laura contacted Ngā Tāngata Microfinance, which is currently in the process of clearing the debt she owes to her BNPL providers. She now has a path out of unmanageable debt and a new perspective on BNPL.

Now that I look at it, it’s not something that I want to put myself through again. I’ve promised myself that when the debt is cleared, I’m deleting the apps and never using them again.