Why ethical investors are ditching BNPL stocks
The fast-growing buy now pay later (BNPL) sector has attracted investor and consumer interest and has led many entrants to jump into the Australian market.
Yet investors and financial counsellors are raising concerns about the structure of BNPL products, their impact on indebtedness and financial hardship and whether increasing regulation over BNPL products represents risk or opportunity for investors.
The BNPL sector is running hot at the moment, off the back of Square's announcement that it would buy Afterpay for $39 billion in a takeover deal.
Some super funds and ethical fund managers have declined to invest in listed BNPL companies over these social concerns. For their part, companies are implementing policies to manage potential risks to financial hardship while noting that because their products don't charge interest, they are not subject to consumer credit products.
How many people are using BNPL?
In a November 2020 report, ASIC reported that BNPL transactions had increased 90% from the 2018 financial year to the 2019 financial year. The ASIC review looked at BNPL arrangements covered by Afterpay, BrightePay, Humm, Openpay, Payright and Zip Pay.
The review found that one in five consumers are missing payments. In the 2018-19 financial year, missed payment fee revenue for all BNPL providers in the review totalled over $43 million, up 38% compared with the previous financial year, according to ASIC.
There are regulatory changes coming that will impact the industry, with the design and distribution obligations coming into effect in October 2021. That, in turn also brings risks and opportunities for companies and investors.
The sector has introduced self-regulation. In February 2021, a self-regulatory code of conduct came into effect for BNPL providers via the Australian Finance Industry Association. Under the code, transactions above $2000 will require credit checks including income and expense information, with more stringent checks for purchases above $15,000.
BNPL providers will also be subject to new regulation coming into effect from October, which could impact on uptake and popularity of products as well as limit the late fees that some BNPL providers charge.
Why is it concerning?
BNPL allows consumers to make purchases pay down the cost through a set series of instalments - lay-by for the digital era. Proponents say that it can be used as a budgeting tool for people to plan their purchases.
Yet financial counsellors note that they are receiving more calls from consumers who are stretched beyond their financial capability and who have multiple accounts of BNPL that they are struggling to pay back.
"It's a concern," says Tom Abourizk, policy officer at the Consumer Action Law Centre. "Even with the introduction of the BNPL code that the Australian Finance Industry Association brought in, that only brought in the level at $15,000. There is no credit check below $2000 whatsoever.
"Because there's no credit check under $2000, you could have consumers that have either have numerous debts, or numerous debts all at the same time - credit card, payday loans, and rather than seeking assistance from a financial counsellor, they go and say we'll get another form of credit and BNPL becomes another form of that. It is absolutely a major concern for us. Australia has one of the highest levels of debt in the world and this is adding to it."
Is BNPL different?
Afterpay differentiates its product from consumer credit products because it does not charge interest.
"We don't charge interest, and consumer credit products are defined by the fact that they charge interest on their products," says Afterpay vice president, global regulatory affairs Michael Saadat.
"There are some key in-built safeguards that exist for our product. Those safeguards are important because they go above and beyond the features that credit cards have. When a customer misses a payment with us, we don't let them spend until they get up to date. We pause the facility."
Afterpay has also capped late fees at the lesser of 25% of the value of the transaction or $68, Saadat says.
Afterpay is also a voluntary member of AFCA, meaning its users can apply to the financial ombudsman regarding issues they may have with the service.