Advocates slam buy now, pay later services as CBA introduces Afterpay rival

Commonwealth Bank of Australia (CBA) has become the first bank to roll out a buy now pay later (BNPL) platform, but advocate groups warn that these services pose an unregulated debt trap.

BNPL gives consumers the ability to pay for goods or services over several instalments. In return, you pay account keeping, transaction fees, and late fees if you miss repayments.

CBA's move pulls BNPL further into the mainstream by providing consumers with an alternative to fintech offerings such as Afterpay and Zip Pay.

To qualify for CBA's service, users need proof of a regular income deposited into a CBA transaction account. Users will then have a limit of $1000, with late fees of $10 per missed payment.

In a press release, the bank touted evidence suggesting BNPL users feel a bank-provided BNPL service would be more secure and reliable.

Maybe so, but what about the debt burden it places on consumers?

"It is too easy to get in over your head with BNPL because the industry doesn't do adequate affordability checks," says Financial Councelling Australia CEO Fiona Guthrie.

"It can also make it hard to budget, because you have to make sure you have the money available for the payments in the future."

BNPL providers claim the service actually helps consumers manage cashflow, but Guthrie says it encourages overspending.

"BNPL markets itself to consumers as being about better budgeting. But what it tells retailers is the actual truth. BNPL encourages people to spend more."

And spend they do, often beyond their means.

"ASIC's November 2020 report found that one in five people had missed a payment - that's a huge percentage. Similarly, one in five had cut back on essentials, such as food, so they could pay."

BNPL providers claim otherwise.

"Last year, BNPL providers have said that no more than 1% of their users have been in financial hardship during COVID-19 but the ASIC's data confirms that the real figure is likely much higher," says Consumer Action CEO Gerard Brody.

The anecdotal evidence alone is cause for concern.

"We have seen elderly communities end up with outrageous contracts for solar panels via BNPL from someone who was door knocking," says Financial Rights Legal Centre policy officer Julia Davis.

BNPL is normalising at a great rate. This week's Afterpay Day saw retailers offer discounts for purchases using the service.

The brand has even been verbed into our daily vernacular: "just Afterpay it."

"This normalises the use of a risky credit product that exploits loopholes in consumer protection," says Brody.

BNPL has so far escaped the regulatory burden of being classified as credit, but that is what it is.

"If it looks like a duck and quacks like a duck, it is a duck," says Guthrie.

"BNPL Is credit and should be regulated in the same way as credit cards and other loans. That means bringing it under the National Credit Code."

This stands in contrast with the regulations that govern credit cards.

Credit card marketing has been regulated. For instance, there is now a ban on unsolicited credit card limit increase offers.

To be fair, BNPL companies have introduced their own code of conduct in an attempt to self-regulate, but it really only goes as far as checking that you can afford to make the first payment.

Indeed a clear conflict of interest arises when a company is attempting to regulate the very thing that makes it money.

"Self-regulation just tends to have low levels of compliance and almost no consequences for breaches," says Davis.

"It's all well and good to put these rules in place, but if there are no consequences then that's not regulation."

Because it's not yet classified as credit, you don't have the same sort of credit protections guarding you against other forms of dubious lending, yet the damage remains the same.

"These debts are real debts, even if they aren't legally considered credit," says Davis.

"A judgement against you will be on your credit report for years, and that can prevent you getting a house for instance."

Until BNPL is more regulated, the onus will be on consumers to fight the impulse to splurge on things they might not be able to afford.

"If there's something you want but can't afford, take a minute and give yourself some friction in that interaction by working out whether this is something you can pay off in the next six weeks," says Davis.

Get stories like this in our newsletters.