Financial Innovation – Not Just for the Youngsters?

The following is an op-ed written by Christopher Zinn and published in the Daily Telegraph on Thursday 29-October 2020

‘Buy Now, Pay Later’ is a consumer revolution causing quite a stir. It claims to take the quaint shopping tradition of lay-by into the digital age and has delighted its users, enriched investors and outraged some consumer groups.

But we should keep an open mind about this revolution, which is clearly having the positive impact of reducing our dependence on credit cards.

Even if the over-50s never use them, given our offspring are most likely customers it pays to appreciate what those four letters BNPL really mean. And although it’s not primarily aimed at us, the innovation might yet prove handy to older consumers. 

Should you fall behind with BNPL payments there are late fees to pay, but its proponents say the system is built on trust, simplicity and avoiding credit card-style debt traps. With BNPL, the immediacy not only trumps the delayed gratification of lay-by; it also kiboshes the risk of racking up huge bills by ‘putting it on the plastic’ and paying usurious compounding interest rates.

Nevertheless, some consumer advocates have been too quick to lump it in the same pigeonhole as credit cards.

A 2019 survey shows about one-third of those aged 25-34 years and 35-49 have signed up for BNPL platforms. The figure drops to just 12% for those aged 50-64 and only 2% for those aged over 65.

While most purchases for the younger groups are for fashion and beauty products, the system works for any number of goods and services subject to caps on the amount you can spend.

The list perhaps more applicable to older consumers includes dentistry, flights, and most anything from the thousands of stores and online retailers who are signed up (and pay between 3-6% of the price to the platforms).

Whether a credit card, personal loan or BNPL is better for you will, of course, depend on how much you intend to spend and how fast you can service the debt. If you’re not one who pays off the credit card regularly, for example, you might be better off on interest-free payment schemes.

Any BNPL transactions are not regulated under credit laws, which require responsible lending provisions and consumer protections to be observed. And it’s this which has led to some consumer groups crying foul that BNPL operates through a legal loophole and should be required to work within the credit laws.

The operators say their loan limits are lower than credit cards, and they can freeze accounts if payments are late plus there’s a cap on how far late fees can accumulate.

So far, the corporate regulator ASIC and a Senate inquiry have looked into the sector and, while some regulation is coming in October 2021, both bodies welcome the industry developing a self-regulatory code of conduct.

ASIC did say the arrangements could cause some consumers to find themselves overcommitted and liable to late fees. It also found one in six users had become overdrawn, delayed payments or borrowed extra money because of BNPL commitments.

But the Senate report found excessive regulation now could curb innovation in financial services later which might benefit consumers.

For example, if the upside of a growing BNPL sector can offset the downsides of excessive credit card use, surely that would be a good thing?

The Reserve Bank’s latest figures state that since March 2020 Aussies have wiped over $7.3 billion which was accruing interest off the national credit card debt.

Since the end of March 2020, over one million credit cards have been removed from circulation. The changes brought by the virus have played their part in the move away from credit cards but so has BNPL.

You are going to be hearing a great deal more about BNPL so don’t assume it’s just for younger consumers. It has a loyal, large and growing customer base and the test is going to be if the sector can self-regulate to address the concerns or will face heavier-handed self-regulation.

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