What consumer groups sometimes miss about Buy-Now-Pay-Later – it’s providing consumers with a much better option than credit cards

Consumer groups are designed to provided consumers with advocacy, support and often collective power. We believe most Australian consumer groups do a great job at this. However, we believe the concern regarding potential risks of Buy-Now-Pay-Later (BNPL) use can be overstated and the positive effect BNPL is having on consumers, under-appreciated. Consumer group Choice are currently surveying their members about Buy Now Pay Later (BNPL). 

The introduction to the survey argues that BNPL is “… marketed as an alternative to credit cards or personal loans but they don’t have the same consumer protections. Buy Now Pay Later companies exploit a loophole in Australia’s safe lending laws that apply to credit cards and other loans and are designed to stop companies selling people into unaffordable debt. That means these companies aren’t legally required to do basic financial checks to make sure people can afford to pay back the debt before signing them up.

The lead question then goes on to ask; ‘Do we need stronger protections for Buy Now Pay Later products’?  We here at SmartWayToPay would argue a very clear ‘no’ to this question. 

There are 3 core reasons we believe this to be the case: 

  1. There are already strong protections for consumers using BNPL products

Afterpay, Zip, Klarna and almost all other BNPL options are covered by AFIA’s BNPL Code of Conduct, which has enshrined consumer protection measures across the wider BNPL industry. 

This Code goes above and beyond the law, setting best practice standards to strengthen consumer protections. It also includes standards that traditional credit cards can’t meet such as preventing new BNPL products from being offered to those behind in repayments and prohibiting spending on gambling products, (which credit cards have not done in relation to online gambling). 

Zip and Afterpay have even partnered with Way Forward, the preeminent Australian debt solutions charity to further strengthen their existing hardship programs. This is yet another measure in place to protect consumers. 

Zip Pay co-founder Peter Gray once famously quipped “We are currently regulated or overseen by ASIC, the ACCC, AFCA, AUSTRAC, the OAIC, APRA, Treasury, the ASX – and now, in addition, the RBA is making moves.” To argue they’re not adequately regulated is hard to argue for.

It’s now widely recognised that BNPL can deliver significantly better consumer outcomes than traditional credit, and requires a different approach to traditional credit regulation. To treat them the same fails to recognise the fundamental differences between the products.  

  1. BNPL is doing an incredible job at being an alternative to credit cards

Just as it was asserted in the survey introduction, BNPL is an alternative to credit cards, and a very good one at that. 

Australians have wiped $7 billion of credit card debt since COVID-19 and closed almost 1 million accounts. Much of this is thanks to the take up of the interest and fee-free BNPL products in the market. This is evidenced by the banks rolling out their own BNPL products as a response.  It can’t be underestimated the competition BNPL is providing in market. However this positive work isn’t complete. 

ASIC recently confirmed that 1.9 million Australians were in persistent credit card debt. Credit cards charging in excess of 20% interest are common in Australia and current federal law caps the total amount of fees and charges on loans such as credit cards at a whopping 48%. This is something we believe should be addressed and something we would welcome other consumer groups like Choice to get behind.

The proof is in the pudding with The Australian Financial Complaints Authority receiving 14x more complaints about credit cards than BNPL products. This is (despite there being twice as many credit cards than BNPL accounts.  

There is still a long way to go in terms of breaking the revolving debt cycle that credit cards can put people in, and we believe that interrupting this process is not good for consumers. 

  1. Credit cards companies are incentivised to keep their customers in revolving debt. BNPLs products are incentivised to keep customers paying on time.  

People from all walks of life  find themselves in need of goods and services and either have the cash to pay for them upfront or just want to manage their budget. In these situations, we believe that BNPL is a far superior product to credit cards. We believe there are enough checks and balances and regulation in regards to BNPL as it stands to protect consumers.

The fundamental difference in the business models when considering BNPL and credit cards should give even the harshest of sceptics some relief. BNPL companies lose customers when they don’t pay off their debt. The BNPL companies enforce this themselves. Their incentives are centred on good customer behaviour. 

Banks and other credit card companies are the opposite. The more times a customer defaults on repayments, the more money these companies make in interest. They have no structural incentive to ensure a customer repays their debt. These are very different business models and should be treated that way.

We all know the boomers with plenty in savings paying their credit card off on time every month just to get rewards and frequent flyer points? They are generally being subsidised by younger credit card users paying sky high interest rates on their credit card debts. 

BNPL tips this model on its head and is saving consumers over a hundred million. 

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