Source: Radio New Zealand
RNZ / Rebekah Parsons-King
Some people are resorting to withdrawing money from their KiwiSaver accounts to clear Buy Now Pay Later (BNPL) debt, financial mentors say, in a new report that indicates recent reforms are not helping consumers.
The report by Consumer NZ and financial mentor network Fincap, with assistance from Victoria University, was released on Wednesday.
BNPL allows people to buy goods or services and pay them off, interest-free, over a set number of weeks. The main providers in New Zealand are Afterpay, Klarna, Zip and Payright.
When payments are missed, late fees are charged.
Before September 2024, BNPL was not subject to consumer credit lending requirements under the Credit Contracts and Consumer Finance Act, because they were not covered by the definition due to not charging interest.
Now, some of the provisions of that act apply, including a requirement that borrowers are given key information about the contracts, and lenders comply with some responsible lending obligations.
But the new research found that all BNPL providers had taken up the option to use credit checks and reporting instead of full affordability assessments on borrowers.
This seemed not to be stopping people from getting into problem debt, it said.
“The fact that BNPL providers must obtain a credit report on new customers and when increasing an existing customer’s spend limit is positive to a degree, in that it means the BNPL provider will have a more informed picture of the customer’s financial position. However, BNPL providers are not legally required to use the information obtained through the credit report to assess whether the customer can afford the loan.”
The report said New Zealand should require affordability assessments for BNPL lending, too.
Report author Victoria Stace noted that the UK and Australia were moving to require more comprehensive affordability assessments. She said that seemed to indicate that affordability assessments would be feasible, and that the current system was not adequate.
BNPL providers remain exempt from a requirement that they not charge unreasonable fees and the report said some still had policies letting them charge “disproportionately high” late payment fees.
The report said BNPL should also have limits on fees.
“The problem with high late payment fees, or multiple late payment fees across purchases, is that they can lead to financial overcommitment/overindebtedness, resulting in consumers borrowing more money to repay BNPL debts or forgoing other essential goods and services.”
The report said “quasi BNPL” such as where a business might offer a payment system for its own goods or services, should be regulated in the same way as traditional BNPL.
“From the consumer’s perspective, the service is the same: they receive a good or service early, must pay instalments and can be charged late fees if they default.”
Stace said the Fincap data showed the number of people presenting with BNPL debt had not gone down since the reforms.
“BNPL is fairly easy to get and it seems to have replaced what we used to have… we used to have payday loans where if people were really desperate for money they could go out and it would be reasonably straightforward to get a high-cost loan from a payday lender.
“We don’t have that facility so much anymore because of the regulation around high-cost lending. It seems that this is the go-to form of credit for people who are struggling to pay for things and it seems relatively easy to get.
“It obviously works well for those who can afford it and pay off their instalments in the requisite timeframe and don’t incur penalties but it doesn’t work well if people who can’t really afford it but can still get access to a BNPL facility.”
Jake Lilley, senior policy adviser at Fincap, said people were still presenting to mentors with BNPL debt and in budget deficit.
The report noted that mentors said BNPL providers were willing to work with people in hardship to match repayments to what they could afford but people were often reluctant to cancel their accounts.
“They’re really worried about how they’ll survive without BNPL,” he said.
“Almost viewing it like an emergency fund or an overdraft … it’s quite a harsh change to get off the treadmill of constantly borrowing for essentials. And so people weren’t opting to take up those hardship arrangements. It’s a really wicked problem… people are taking out KiwiSaver hardship to keep those accounts alive.”
He said people thought of the accounts as something they really needed. “We need to look at how people are responding to it and get smart in terms of protections to make sure we don’t get trapped.”
Mentors said BNPL providers were quick to send loans to debt collection.
The report said they also noted BNPL was sometimes accessed after other loan repayments had become unaffordable because affordability requirements that other lenders were subject to had ruled out other credit options.
Lilley said it was now up to Parliament to give the Financial Markets Authority new responsibilities and powers to be able to action the report’s recommendations.
“While that progresses we also need moves to licence debt collectors at the FMA so we are in a position to monitor the fairness of how unaffordable BNPL loans are collected over the coming years.”
Afterpay has been approached for comment.
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– Published by EveningReport.nz and AsiaPacificReport.nz, see: MIL OSI in partnership with Radio New Zealand