A different credit model
Buy now, pay later schemes warrant some regulation. Just not too much, writes Gary Rohloff.
Buy now, pay later (BNPL) has attracted its fair share of headlines in recent weeks, and not all of them positive. While it has its detractors, consumers love BNPL. It is the world’s fastest-growing payment method, with global payments expected to quadruple by 2026. At the same time, almost every other traditional payment method is expected to fall.
New Zealand is at the forefront of this payments revolution. One in three Kiwis have used BNPL to make a purchase, and its usage in New Zealand has more than doubled since 2019.
And while younger shoppers were the early adopters, with 44% of millennials saying they use BNPL (according to a 2021 Finder survey), this is beginning to change. Nearly 32% of Gen X and 10% of Baby Boomers say they have used it.
The secret to BNPL’S popularity is that it provides a convenient and interest-free alternative to credit cards, letting customers spread their payments with no hassle.
A Ministry for Business, Innovation and Employment (MBIE) report last year found 75% of BNPL users reported extremely high satisfaction rates. This shouldn’t be a surprise given credit card companies have been taking advantage of Kiwis for decades.
Not only do credit cards charge exorbitant rates of interest, they charge administration fees, statement fees, cash withdrawal fees, annual account fees and missed payment fees. If they can charge for it, they will!
According to Reserve Bank statistics, $2.9 billion is currently owed on credit cards, and that is attracting interest. At an average interest rate of 18.4%, this means we are paying more than $500m every year in interest charges alone.
We need to make sure we are protecting vulnerable consumers. After all, BNPL is still a form of credit. But putting it in the same regulatory framework as credit cards is the wrong approach.
This would impose enormous compliance costs on BNPL providers that the business model is simply not built for and which would deliver no tangible benefit.
Despite credit cards being regulated, data from credit agency Centrix shows BNPL and credit cards have almost identical arrears rates for those under-30. And according to MBIE, the average credit score for users of BNPL and users of credit cards is exactly the same. This shows BNPL providers are already exercising appropriate restraint when it comes to deciding who to lend to.
The reality, however, is that credit cards and BNPL are very different products and regulation needs to treat them as such. Credit cards provide the lender with a motivation to keep the borrower in debt so they can continue to be charged interest. With BNPL, as long as consumers make their payments on time, they don’t pay anything. There is no interest, no account fees and no establishment costs.
Instead, we earn our money through a transaction fee paid by merchants when a customer buys using BNPL. And while we do charge a late fee for a missed payment, this is no different to any other credit provider, including your phone company.
The BNPL business model works best when customers pay on time. In an ideal world, we wouldn’t have any of our customers paying a late fee. Yes, there will always be examples of people who find themselves in financial difficulty when using BNPL, but this is not the norm.
What is required is a regulatory framework that sets minimum standards but also supports continued innovation and delivers benefits to consumers. This is the approach the UK and Australia are taking, and it is the approach we should be taking.
There should be rules on credit checking and reporting, marketing, independent complaint processes and obligations to support customers in hardship. And there should be caveats on where BNPL can be offered. In my view, it should never be used at liquor stores or for gambling.
But we need to resist the urge to take a sledgehammer to a thumb tack. Our regulatory response needs to be proportionate, designed to support the sector to innovate and disrupt the payments landscape.
This would allow consumers to continue enjoying all the benefits BNPL delivers while providing better protection and a better option than paying interest on a credit card.
Gary Rohloff is the co-founder and managing director of BNPL business Laybuy.
This opinion is not necessarily shared by newspapers.