If it walks and talks like credit: behind the regulation of Buy Now Pay Later
In today’s post, Emma O’Neill of Good Shepherd (@GoodShepANZ) explores the potential impacts of the Government’s proposed regulation of Buy Now, Pay Later Products. Emma is a Senior Policy & Advocacy Advisor with a particular interest in women’s economic security, gender and climate change, and the impacts of marketisation on social equity.
It’s time for regulation of Buy Now, Pay Later products
The credit products known as Buy Now Pay Later (BNPL) will soon be regulated in Australia, ending a commercial free-for-all and imposing some constraints on BNPL providers. By the end of 2023, BNPL will be regulated under the National Credit Act in a similar (but not identical) way to other credit products. That means mandated affordability and suitability checks, caps on late payment fees, greater customer control over account limits, and much more oversight of BNPL providers.
Image by Natalie Boog, from the Australian Financial Review’s coverage of the Assistant Treasurer’s announcement about BNPL reform
In announcing this move, the Assistant Treasurer and Minister for Financial Services, Stephen Jones, identified some of the major groups at risk of unmanageable BNPL debts – women, First Nations people, and people on low incomes. This reflects our experiences at Good Shepherd: women using our financial services are more likely to have BNPL debts than men, driven by economic insecurity and BNPL marketing targeted at women.
The Assistant Treasurer also rightly highlighted the weaponisation of BNPL for financial abuse. This happens when women and others are coerced into BNPL debts by abusive partners, or BNPL accounts are opened and run up in their names without their knowledge. This abuse is facilitated by the ease with which BNPL can be obtained – a BNPL 'useability feature' that has allowed this product to expand unchecked, while enabling abusers to control women through debt.
Women’s economic security and safety must be uppermost in Treasury’s mind as the BNPL legislation is drafted over 2023. Government has signalled that the laws protecting us from pushy and exploitative lenders (the ‘Responsible Lending Obligations’ or RLOs) will be modified to some degree for BNPL, and scaled according to the perceived risk of different BNPL products or account limits.
This approach brings dangers, and is not the one advocated for by community and consumer organisations. The new regulations may underestimate the various risks attached to BNPL products, and miss opportunities to connect people with more affordable and suitable options. The regulations should therefore follow the existing RLOs as closely as possible, and prioritise the prevention of financial abuse, ensure the visibility of existing BNPL debts, promote alternatives to BNPL, and accompany other structural changes to reduce the drivers of BNPL use.
Incorporate lending obligations that guard against financial abuse
The Responsible Lending Obligations are an important protection against financial abuse. This includes checking that a BNPL product actually meets the needs of the person carrying the debt, rather than an abusive partner who’s using it, let’s say, for petrol and cigarettes, depriving his partner of money for essentials. It also includes checking an applicant’s identity and financial documentation to guard against fraud by abusive partners.
Where a person does experience financial abuse through BNPL, enforceable obligations like these would provide an avenue for individual redress, and allow ASIC to investigate and litigate systemic failures by BNPL providers to properly guard against financial abuse.
People go into debt spirals to try to manage BNPL costs. Source: Safety Net for Sale Report
Ensure multiple BNPL accounts are visible
Multiple BNPL accounts with small limits can quickly mushroom into big debt problems if the total credit usage of an applicant is not visible to—and taken into account by—BNPL providers. Our report found multiple BNPL accounts are common, with 84% of Good Shepherd practitioners saying that clients with BNPL debt have tried to manage the debt by opening additional accounts. As one practitioner commented:
“You normally see 3-4 accounts, and people keep rolling them over. It keeps them in poverty… there’s always a point where people can’t manage more. They find out when they reach it. Each person is different but there’s always a point where it becomes a problem.” - Good Shepherd practitioner
BNPL providers should be required to participate in the credit reporting regime to ensure all providers have the full picture of an applicant’s debt load. This will enable providers to examine affordability and suitability issues when considering new accounts.
Leverage the reach of BNPL providers to promote alternatives
BNPL providers should be obliged to provide people with information about BNPL alternatives, community services, and debt support services when applying for an account, and at any time where hardship/affordability or abuse risks are identified. These alternatives include No Interest Loans, which are available around Australia to single people earning up to $70,000 per year before tax, and those with a partner or children earning $100,000 per year before tax.
At a time of very high energy prices, the Federal Government could also promote people’s regulated entitlements to payment difficulty support (including payment instalments) to counter some BNPL providers’ promotion of their product to pay utility bills.
People are using BNPL to supplement inadequate social security rates and wages. Source: Safety Net for Sale Report
Regulation is not the only answer to the BNPL problem
As vital as these regulations are, controls on BNPL are only one part of the story in tackling damaging BNPL use. As our 2022 report shows, BNPL has found a very profitable home in Australia because people are financially stressed and made vulnerable by structural failings in our welfare and labour systems.
People resort to credit because JobSeeker and other social security payments are punishingly low, and inflation has utterly outpaced wage growth, particularly in female-dominated care workforces.
The Federal Government acknowledged in the 2023-24 Budget that working-age social security payments are too low, but increased them by only $40 a fortnight. This now needs to move much higher, with the Government’s own Interim Economic Inclusion Advisory Committee recommending that increasing working-age social security payment rates to 90 per cent of the Age Pension would significantly improve their adequacy and restore the unemployment/Age Pension rate relativities that existed just over 20 years ago. Equalisation of payments, and ongoing indexation to the cost of living, is the least that can be done for the disproportionate number of women and children who rely on JobSeeker and related payments.
Alongside social security and wage increases, women would also benefit from supplementary financial support to cope with the economic impact of family violence and establishing a stable home. Practitioners at Good Shepherd report that women are accumulating unmanageable BNPL debts after fleeing family violence and needing money to cover basic needs.
We recommend in our BNPL report that the Federal Government strengthen debt-free financial supports for family violence victim-survivors by improving the amount and accessibility of the Escaping Violence Payment. It is good to see waiting times for this important payment reduced from 33 to six business days. The next step is to increase the maximum payment rate from $5000 to $10,000 in line with States such as Victoria, which better reflects the immediate costs associated with leaving violence and settling down somewhere new. Providing women with greater flexibility around how they use these funds would ensure dignified and effective access to resources, when and where they are needed.
The BNPL phenomenon is therefore symptomatic of deeper issues at play in our country. Regulation of BNPL is a much needed and very welcome move, but must be complemented by the regeneration of our social security system to build women’s economic security and safety.
Posted by @PNagorckaSmith