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.

cba introduces afterpay rival

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.

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David Thornton was a journalist at Money from September 2019 to November 2021. He previously worked at Your Money, covering market news as producer of Trading Day Live. Before that, he covered business and finance news at The Constant Investor. David holds a Masters of International Relations from the University of Melbourne.
Stewart Crammond
March 20, 2021 11.40am

BNPL companies have very cleverly exploited the modern mindset of instant gratification, which is a human trait that has manifested itself as a result of technology over the past 20 or 30 years.

The concept of budgeting and having a plan to achieve financial goals seems to be dwindling generally, which is a natural follow on from our total reliance on credit in its various forms.

It's quite pathetic and weak that people can't be disciplined enough to save for 4 to 6 weeks until they have the money to purchase this stuff, which they arguably do or don't need.

This discipline of delayed gratification, will teach them all they need to know about money management and future investment.

It's really not that hard to do.

David Wright
March 22, 2021 11.58am

Stewart I agree but would add that if you leave technology out of the equation, this is a human trait that has been manifesting itself over the past 2000 or more years! In ancient Babylon people would take out loans to buy things that they could not afford now, and the penalty for not repaying on time was slavery for the rest of their life, so human nature has little interest in the negatives when desire takes over!

The real cruncher with Buy Now Pay Later is that by the time the final payment is made for that 'thing' the consumer just had to have now, the 'thing' has totally lost it's shine and I'm hearing feedback from Spending Planners who are working with clients with BNPL pain, that in many cases their clients can not even tell them what the payment(s) are for. I.e. they have totally forgotten what it was that they just had to have 6 weeks ago!

Instant gratification gives the lowest form of satisfaction.

If you took two brand new Ferrari's and gave one to someone as a gift and made another person pay full price for the other, you know that the one that was a free gift will be totally trashed in super quick time because there was no pain in getting it.

The one that required pain PRIOR to receiving it will have been valued it much higher, will have been looked after it much better and will have been appreciated it much better.

BNPL takes away so much more than the waiting time!

It's time this loophole was closed down because BNPL leads to money stress and money stress leads to domestic violence which everyone agrees has to be dealt with NOW.

Stewart Crammond
March 25, 2021 11.31am

Well said David. When it comes down to it, it's not much different to the 55 day interest free period on most credit cards. If you pay the whole bill when it's due, it's basically no different really, as no interest is charged (although most credit cards do have an annual fee).

If people are using one or the other and pay off the full amount when due then no problem, however I would be interested to see what proportion of Afterpay users also have a credit card with either a maxed out balance, or any carry over balance each month, with interest payable every month. It's these people who are, unfortunately, on the never never downward spiral.

Rebekah Rodrugues
March 21, 2021 9.16am

This is not about delayed gratification, sure we could save for it but by the time that happens the item we needed has long gone off the shelf or the sale has finished. Im a long time user of Afterpay and its much easier to pay in instalments than all in one go as bills, rent etc often get in the way. Ive never been late and always budgeted for my upcoming payments. Its not pathetic its life. Afterpay is great.

Stewart Crammond
March 24, 2021 11.18am

Hi Rebekah

I respect your point of view, you seem to be budgeting for it and planning ahead which is great. My fear is that one in 5 people who use the service aren't as diligent as you and get themselves into trouble.

What happens to these people when they take out Afterpay for something and then the washing machine or fridge pack it in?

You can be pretty much guaranteed that by the nature of how and why people use Afterpay, they likely don't have an emergency bank account, with say $2-$10K in it as an example.

There is also a big difference between must have items and want to have items. It would be an interesting piece of research to see exactly how, why and for what people are using Afterpay for. My assumption is that it's mainly for stuff they can easily do without, but if anyone reading this has some verified research they could share, that would be an interesting discussion.