OVERDUE - Buy now, pay later
A global pandemic and the nation's first recession in 29 years has seen Australia’s national debt blow out by 40% to $703 billion, thanks largely to the pandemic.
It seems ordinary Australian’s have taken a more prudent approach, reducing their collective credit card bill by more than $7 billion over the past year.
However, this is in contrast to the boom in 'buy now, pay later' services. But regulators are circling and consumer advocates warn that this modern day lay-by service leaves Australians at risk of spiralling into debt.
The buy now, pay later model, which typically allows customers to pay off purchases in instalments and avoid fees if they pay on time, has seen massive growth amid the coronavirus crisis.
But the concern is that the industry is not regulated like other financial services.
Whilst the pandemic has been a time for saving for many, with over 800,000 credit cards being cancelled this year, with fewer spending opportunities, Australians are pulling the plastic out of pockets less frequently and paying off credit card debt. Overall slide in the value of credit card debt held by Australians is a big positive, showing that "people are setting themselves up for a better Christmas"
However, some Australians have used their superannuation savings to pay down debt after being granted temporary access under the Morrison government's early release scheme.
Many experts have stated that this has set up a "false economy". Since they are using money that seems to have fallen off a tree, there is a likelihood they may fall back into debt once the one-off window of raiding super closes at the end of the year.
However, the credit card debt reduction is in contrast to the booming buy now, pay later services. Where we have seen over 1,100,000 transactions of buy now, pay later customers miss payments. With 20% of buy now, pay later users missing payments and 15% of users taking out an additional loan to pay for the services.
This is the big problem that is concerning regulators and consumer advocate groups.
The Consumer Action Law Centre said “It remains concerned with a lack of standards in the buy now, pay later sector which results in young people “being set up to fail” & it maintained its call for credit laws to apply.”
As many experts are concerned that the services are barely regulated because of a legal fiction whereby they are not considered consumer credit on the basis that they charge fees not interest.
Many believe this to be ludicrous.
As the providers literally lend you money to buy something, creating a debt that you must repay.
In addition, if you don't, they can record it on your credit history and even refer you to debt collectors. And yet, it is still not considered credit?
This loophole means they don't have to do a credit check to assess someone's ability to pay. They don't have to take into account whether the consumer is already using credit cards or other "buy now, pay later" services. They are not obliged to belong to the ombudsman scheme, the Australian Financial Complaints Authority. Some do, though they could pull out at any time, but many don't.
The ASIC report contains analysis of users who link credit cards to buy now, pay later providers.
Effectively, users are DOUBLE GEARING - where they are borrowing for a purchase via a buy now, pay later service, before repaying this purchase via a credit card, seems ridiculous to most.
With 50% of those that missed payments aged between 18-29 are consumer protections & regulations the answer?
Or does this highlight the problem that the younger generation has limited financial experience & limited financial education, proving it difficult to see an alternative outcome.
As a financial planner, we a big advocates of financial education and ensuring our clients have all the information available to make an informed decision. This involves understanding the risks, benefits and associated consequences to your decisions.
As a financial planner, we see all too often people making poor behavioural decisions that affect their long-term financial situation.
For examples, when clients are looking for a home loan or investment property loan, banks now do not look fondly upon buy now, pay later services. As if you cannot afford to purchase a $150 pair of shoes outright, why would a bank consider lending you $500,000 to buy a home?
Treasury is preparing to review regulation of payments system, including consumer protections and ASIC has recognised “policy regulation of the buy now, pay later industry remain a matter for Government & the parliament.”
In addition, the recent ASIC report recognises the significant shift from traditional forms of payment & the declining usage of credit cards.
And with the rise in transactions to 32 million, resulting in total revenue for the providers of $400 million for the financial year 2019, the buy now, pay later service is not going anywhere.