In today’s analysis, Phoebe Nagorcka-Smith (@PNagorckaSmith) of Good Shepherd Australia New Zealand (@GoodShepANZ) uses evidence from their recent ‘Safety net for sale’ report to explore how Buy Now Pay Later is used to trap family violence victim-survivors in debt, and why regulation is key to preventing it.

BNPL services are featured prominently on many online stores

Buy Now, Pay Later is not the same as lay-by

Buy Now, Pay Later (BNPL) services are a type of loan that allows people to pay off purchases in installments over time. There are a lot of different companies, including Afterpay, Humm, LatitudePay, and Zip Pay.

While BNPL is a loan, it’s often marketed as something closer to lay-by, where people pay off items bit by bit before picking them up from the store. This is misleading, as BNPL is a debt, where lay-by isn’t: so people might not realise that their BNPL accounts are taken into account when they apply for a loan, or credit card. While BNPL providers market their products as ‘interest free’, the reality of account keeping fees and late fees means that many people end up in significant debt after borrowing a relatively small amount.

“…the problem with [BNPL] is that it is viewed less seriously as a debt when compared to cards and loans. I see clients talking casually about BNPL buy wary of credit cards, then they are the same things. BNPL has done a great job to remove the stigma of ‘bad credit’, when that is exactly what BNPL is.” – Good Shepherd Financial Counselling and Capability practitioner

People are going into debt to pay for essentials

BNPL use has increased dramatically over the past 5 years. People are shopping online more, where BNPL is heavily marketed as a payment option, but many are also facing greater financial struggles due to high inflation, insecure and low-paid work, and consistently low welfare payments.

BNPL use is increasingly showing up as a feature of financial stress in financial counselling and No Interest Loans (NILs) clients at Good Shepherd. The proportion of clients who have BNPL debt increased eight-fold between 2017 and 2021, and 60 per cent of our practitioners estimate that at least half of their clients have BNPL debts. The groups with the highest BNPL use are single parents, young people, women, and people who receive social security payments: all groups who are at risk of policy-induced poverty due to factors such as employment conditions, barriers to accessing welfare, and low social security payments.

*Source:* Safety net for sale: The role of Buy Now Pay Later in exploiting financial vulnerability – Good Shepherd

Persistently low incomes and stretched budgets makes delaying payments, and splitting them over a number of pay cycles, appealing. This is shown in a breakdown of what people use BNPL to buy: overwhelmingly essential items, like children’s clothing, groceries, furniture, and utilities. BNPL providers are capitalising on our inadequate social safety net to enroll more people in their products.

*Good Shepherd Financial Counselling and Capability practitioners estimate that the majority of BNPL purchases are for essentials. Source:* Safety net for sale: The role of Buy Now Pay Later in exploiting financial vulnerability – Good Shepherd

When BNPL is used to pay for everyday items, it is easy for the debts to accumulate and spiral out of control. An alarming 78 per cent of Good Shepherd Financial Counselling and Capability practitioners report that their clients with BNPL debts struggle to make payments on time, 73 per cent have clients who have cut back on essentials in order to pay their BNPL debt, and over half see clients who rely on other credit cards or loans to make repayments.

“Most clients can’t afford one payment, so they get another to pay the first, then another to pay the second and so on. I have clients with up to 10 BNPL products.” - Good Shepherd Financial Counselling and Capability practitioner

BNPL exploits regulatory loopholes

Currently, BNPL services are exempt from the National Consumer Credit Protection Act (Credit Act), largely because they avoid charging interest by instead imposing account keeping and late fees. This exemption means that providers are not required to meet responsible lending obligations, such as thorough identity checks, assessing a person’s capacity to pay, and loan suitability based on a person’s situation and needs. It is this exemption that makes it so simple to sign up to a BNPL account and start spending.

This also means that it is relatively simple for perpetrators of financial abuse to use BNPL as a way of controlling and harming their partners. This can include setting up accounts in someone’s name without their knowledge, using their accounts to rack up thousands of dollars of debt, or coercing them to pay for items that they get no benefit from. Currently, if someone has basic personal information about another person such as name, address, birthday, and a phone or computer password, they are able to set up a BNPL account in their name, sometimes even without their knowledge. The same information could also be used to rack up expenses on an existing account. There are women who are thousands of dollars in debt, with nothing to show for it: instead, their abusive partners have benefited from the purchases, and left them in debt.

Hardship support is inconsistent

Another consequence of being exempt from the Credit Act is that providers are not obliged to provide hardship support, even when people are showing clear signs of financial distress or family violence. Good Shepherd practitioners reported a large variation in response times, cooperation, and willingness to negotiate affordable repayment plans with customers. Many BNPL providers are only contactable online, making a phone call or face to face support difficult.

“[It’s] sometimes impossible to get through to relevant financial assistance team (some of the BNPL companies don’t even have call centres), response times [are] much longer.” - Good Shepherd Financial Counselling and Capability practitioner

The lack of protection and difficulty negotiating a way out of BNPL debt can trap victim-survivors of financial abuse in debt cycles for many years after a relationship ends.

Closing lending loopholes is critical to preventing financial abuse

Bringing BNPL products under the Credit Act would better protect people from financial abuse using these products. A requirement to check someone’s identity would reduce fraudulent accounts set up by perpetrators without their partner’s knowledge, as identity verification is part of the process.

Checking the suitability of a loan for someone includes a conversation about what the money will be used for. This is an important step for people at risk of or experiencing financial abuse, as it would prevent cases of perpetrators using accounts for their own benefit, and flag potential abuse to the loan provider. This is a potential intervention point, to offer support to victim-survivors.

Regulation also guides the level of support that BNPL providers are required to offer people who are experiencing financial hardship and family violence. Manageable repayment plans, debt waivers, and bans on BNPL providers on-selling debts to debt collectors in cases of financial abuse will help to prevent debt spirals.

Regulating BNPL is only one part of the conversation

As we discuss regulation, it’s also important to highlight some of the drivers of BNPL use. People are driven to commercial credit products because our safety net is woefully inadequate. People should not be forced into debt in order to feed and clothe their families or escape from family violence. Raising the rate of welfare payments to a living wage, ensuring timely access to Escaping Violence Payments for victim-survivors, abolishing the gender pay gap, and seriously addressing unstable and low-paid employment are critical to ensuring people do not have to turn to unregulated credit.

Alternatives to BNPL that address the need of people on low incomes could also be supported. Payment splitting – or enabling people to pay for essentials like utilities and other bills through monthly payments - and safe, not-for-profit credit products like No Interest Loans offer support for people on low-incomes without hidden fees and unaffordable debt.

What are the next steps?

Treasury has released an Options Paper, with submissions closing 23 December 2022. They have proposed three potential ways forward: business as usual, full regulation of BNPL as credit, and a mixed model that scales back responsible lending obligations. If the significant use of BNPL to perpetrate family violence is going to be effectively addressed, it’s critical that BNPL is fully regulated as credit.

To find out more, read the full Safety Net For Sale report and follow #closelendingloopholes on Twitter.

Posted by @PNagorckaSmith

Buy Now Pay Later is not the same as lay-by