Regulators should look at Buy Now, Pay Later schemes

Regulators should look at Buy Now-Banner 

“Own it now, pay later,” “No hidden fees, even on late fees,” “Shopping’s new normal.”

With these kinds of promises, it is no surprise that AfterPay, zipPay, OxiPay, Humm and Klarna are part of the “Buy Now, Pay Later” credit phenomenon taking  the retail industry by storm.

And for shoppers who are financially secure, compliant with payment deadlines and equipped with financial literacy, these services present no issues. Unlike credit cards, they do not charge interest, and default payments on each transaction are small.

However, “Buy Now, Pay Later” is an unregulated “Wild West” financial landscape that holds hidden pitfalls for people who are already vulnerable to hardship and vicious cycles of indebtedness and poverty.

Throughout the Covid-19 pandemic, the shift to e-Commerce and online shopping has strengthened the foothold of pay later schemes in retail markets.

In New Zealand, around 3000 retailers now offer at least one of these options and approximately 10% of the adult population in Australia have used one.

A revolution in retailing

Unlike traditional loans and credit cards, Buy Now, Pay Later services provide interest-free, short-term credit often advertised as “a healthier, simpler and smarter alternative to credit cards.” This is a revolution.

Previously, layaway allowed customers to pay off products over time and collect them later, and credit cards allowed customers to buy straight away, but charged interest for the delayed payments. Interest has always been the dangerous spectre haunting credit arrangements, but these new services remove the threat of interest, and the administration delays of applying for credit with a bank or store—giving you immediate access to the goods.

However, because they do not charge interest, Buy Now, Pay Later schemes also avoid the strict oversight and stringent regulation that govern traditional consumer credit products.

While these pay later providers would point out that they do not charge interest and the maximum “late fee” that they charge for non-payment on a transaction is $15, they have no duty of care to check if customers are financially able to pay back money before they loan it to them.

Unlike credit services which are required to perform checks before loaning money, customers can enter into as many Buy Now, Pay Later transactions as they like, with AfterPay, Laybuy, Klarna and any number of other providers.

All of a sudden, $15 per transaction can become an unassailable mountain of added debt.

For people who are already vulnerable, “shopping’s new normal” can quickly look like accumulating late fees on top of repayments; the later the payment, the bigger the fee.

Financial regulators

Our financial regulations exist to stand between companies and consumers to make sure that potentially vulnerable consumers are not taken advantage. When legislation fails to match the pace of new financial providers and products, it provides ample opportunities for unsafe and harmful lending that primarily impacts those who are already struggling financially.

Buy Now, Pay Later schemes are currently operating in a Wild West that allows for predatory lending, we need the government to ride in and lay down the law.

‘Alapasita Teu is a Researcher at Maxim Institute based in Auckland.

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