Buy Now Pay Later Schemes: The ‘Addictive and Dangerous’ Predatory Schemes

What are BNPL schemes?

BNPL is a payment option that allows customers to buy items and pay for them over time by breaking the payments into equal instalments. This payment option has become increasingly popular in Australia, with over 20 schemes available in the market such as Afterpay, Zip Pay and Klarna. While these schemes are convenient, it has been observed that some customers have started to use these schemes for everyday expenses such as groceries, which is leading to a lack of affordability.

The risks of BNPL schemes

The BNPL sector is becoming increasingly popular, but it is not entirely without risks. Many customers are struggling to manage their spending and are letting their fees rack up. A recent survey by GetMyRefund found that almost a quarter of people surveyed had multiple BNPL accounts and over 10 percent had spent more than they intended, letting their fees pile up. This is a worrying statistic that highlights how vulnerable people are to falling into debt because of these schemes.

While BNPL providers currently face voluntary regulation through an industry code, nine providers are already signed up to it. The code demands that providers check the suitability of a transaction worth more than $2000 and provide customers with a proper complaint handling procedure that meets the required Australian Securities and Investments Commission standard. It also requires hardship provisions to ensure that customers facing difficulties receive the help they need.

The impact on young Australians

Young Australians are the most vulnerable to the risks of BNPL schemes. People with thin credit files, in particular, face an increased risk of falling into debt because of it. CEO of GetMyRefund, Carly Woods, explained that as more and more people take out BNPL arrangements to survive, they are buying items as simple as groceries on credit. This high level of use is a sign that people are becoming addicted to BNPL, which is placing them in financial hardship. If urgent regulation is not put in place, then even more Australians will be forced into financial difficulty because of these schemes.

It is important to remember that BNPL schemes can also have adverse effects on credit scores. As young people continually take out loans for everyday use, they may not realise that it could negatively affect their future borrowing ability; ultimately decreasing their chances of obtaining a larger borrowing. This is why Carly Woods wants to see an affordability test put in place before people can take out loans. This will help to ensure that only people who can manage their spending are eligible for BNPL.

The call for regulation

The federal government is now looking to clamp down on BNPL services because of their deceptive practices. The government is calling for submissions into three options recommended by Treasury, Assistant Treasurer Stephen Jones said. While he acknowledged that the industry’s code of practice had worked well so far, he insisted that stronger oversight was crucial as the sector matures.

1. The first option would involve light-touch regulation combined with affordability tests to strengthen self-regulation.
2. The second option would involve partial regulation under the Credit Act, which would require providers to obtain an Australian credit license and also strengthen its industry code.
3. The third option is the most comprehensive, involving full regulation of the sector under the Credit Act, and applying the same responsible lending obligations that currently apply to credit card providers.

Lana Whitbread, who also shared her concern about BNPL schemes, described them as “addictive and dangerous” and that she finds it easy to fall back on them. She revealed that she used these schemes when unemployed, choosing to pay for purchases over bills. Lana has since found employment and now works in Coles Supermarket, where she sees people buying hundreds of dollars’ worth of groceries on BNPL payment platforms. While these schemes offer benefits such as incentive rewards for loyalty, speed and ease, they are putting many Aussies at greater financial risk.

Published:Thursday, 30th Mar 2023
Source: Paige Estritori

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