It’s been called the “gateway drug to debt” by the Australian Financial Review, with charities stating that the level of social harm is unfolding at an increasing rate, but there is no doubt that the buy now pay later (BNPL) product has provided consumers with an alternative to credit cards.
Afterpay Day is an online and in-store shopping event, taking place twice a year. Heavily promoted by Afterpay, who are one of Australia’s first online services allowing customers to pay for purchases in four instalments, it’s touted as an alternative to credit cards but with no credit checks.
Sometimes compared to lay-by in reverse, BNPL charges fees rather than interest on the purchase like credit cards, which allowed them to escape credit card regulations through a loophole in the National Credit Code. With around 10 providers in Australia, and retailers often preferring one over another, its become a serious issue for consumers to stay on top of what they owe and who to – ultimately taking on far too much debt than they can manage.
Over the past 12 months, cost-of-living pressures have intensified, and business closures have ramped up. Conversely, Afterpay reported that its 3.5million customers continued to spend heavily during the same period, primarily driven by Millennials, resulting in of $2 billion for the 18 months to December 2023.
Trevor Greenhill, Managing Director at Cloud Payment Group, said prior to the Federal Government law reforms released in June, the sheer volume of bad debts was incredibly worrying for everyday Australians,
“Whilst there is no doubt it has brought significant financial flexibility for many people, the BNPL sector faced a perfect storm in the form of a crowded marketplace, rising interest rates, bad debts and the threat of Federal regulation. Already vulnerable people trying to manage debt arrangements, are taking on even more just to pay for everyday necessities.”
The debt spiral
BNPL did not previously offer the same legal protections as other credit products before the Federal Government legislative announcement in June. With no legal obligation for BNPL lenders to check if a customer could safely repay the debt, it left many struggling to making repayments – some even forgoing essentials such as food to make the fortnightly payment.
A survey in 2022 by Australian not-for-profit Good Shepherd, found 84% of financial practitioners reported that their clients had attempted to manage debt by opening additional BNPL accounts, leading to a worrying and unmanageable debt spiral.
Cloud Payment Group have encountered a growing number of people who have become caught in this very situation. Trevor Greenhill explains,
“The situation has been worsening over the past five years. We’re seeing people struggling to pay medical bills for example, because they have multiple BNPL accounts that are all taking money out at different times. They just can’t get a handle on things financially. We usually always come to a payment plan arrangement with them, but the team have been hearing alarming stories including people who are using BNPL to buy nappies and baby clothes.”
The way out of debt
Trevor Greenhill has suggestions for consumers who are either facing difficulties or looking for more information.
“The team at Cloud Payment Group have encountered many situations where people have gone into the BNPL debt spiral, and work with them to set up payment plans. Our advice for people who are either stuck in the payment spiral, or are looking at BNPL as an option, should consider these four options to get their finances back on track.”
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Ask for help
Contact the provider directly and let them know you are experiencing financial hardship. Whilst you may not get the outcome you need; it should always be your first call. Many providers also pause financial penalties whilst they are looking into your case.
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Use just one provider at a time
Avoid using more than one buy now pay later service as it’s more difficult to manage your money
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Talk to a financial counsellor
Many not-for-profit’s such as Anglicare offer free financial counselling services
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Set a limit and stick to it
Don’t be enticed by the ever-increasing spending limit you are offered, stick to something you can afford
Finally, the new legislation around BNPL revealed by the Federal Government in June and set to roll out later this year will provide more protection for consumers.
Commented Trevor Greenhill,
“We support the new requirement for BNPL providers complying with Responsible Lending Obligations (RLO) and holding an Australian credit licence. Every day we speak to vulnerable Australian’s who are in precarious financial positions and the more protections they have under law the better off they will be in future.”