Shoppers are being warned not to rely on using buy now pay later services to take advantage of Boxing Day or holiday specials or they may face getting into a debt trap.
Buy now pay later providers offer the ability to get a good or service upfront while paying for it in instalments over a period of usually four to six weeks.
They don't charge interest but can have hefty penalty fees if users miss a payment and the Government is currently looking into how the payment method could trigger financial hardship and what the options are for addressing that.
John Cuthbertson, financial services leader at Chartered Accountants Australia and New Zealand, said that while the payment method had enabled many to get their hands on products earlier than they otherwise would have, it had also created a financial black hole for some who were struggling to get themselves out.
"Our message this Christmas is simple: don't land yourself in a BNPL [buy now pay later] debt trap.
"It may be tempting to load up your BNPL account with multiple or big purchases, but when the repayments all hit at once, week-in, week-out, you will curse the holiday period and struggle to make ends meet."
Cuthbertson said missing a payment could be brutal.
"There can be very good reasons to use a BNPL platform sometimes, like when you have to buy an expensive new appliance and you don't have thousands to stump up for immediately," he said.
"However, everyone should do their homework and plan for the repayments – and wherever possible and necessary look at these services for the big and essential purchases, not in the incidental or unnecessary ones."
Last month the Ministry for Business Innovation and Employment (MBIE) released a discussion paper on the sector.
It found New Zealand has seven buy now pay later operators - Afterpay, Humm, Zip, Laybuy, Genoapay (Latitude), Openpay and, most recently, Klarna - with the average amount per transaction $210.
While BNPL firms receive most of their income from businesses that use their service, about 26 per cent of their revenue comes from default fees paid by consumers.
And the number of Kiwis using it has exploded in recent years, with about 260,000 at the start of 2019 rising to more than 550,000 by August this year.
Users are more likely to be female and under 45, although a growing number of over-60s are getting on board.
The report noted that if used appropriately, buy now pay later can help consumers make purchases without paying establishment fees or interest and can be an effective way of spreading the cost of an item.
For businesses it can help boost their sales and can be less risky than other forms of credit where missed payments have to be followed up by the retailer itself.
They also noted it was likely to increase the competition between BNPL and existing credit providers which may benefit consumers.
But at present, industry players operate outside the Credit Contracts and Consumer Finance Act because they do not charge interest or establishment fees or take security over the item purchased.
That means providers are not required to assess a consumer's financial position or assess whether the consumer is likely to be able to repay the debt without substantial hardship.
Financial mentors have already warned MBIE that BNPL creates financial hardship for some members and they believe it should be considered as debt.
According to a survey conducted in January 2021, 63 per cent of BNPL consumers were extremely or somewhat concerned about their level of debt, compared with 38 per cent of the general population.
Data covering 35 to 40 per cent of the market suggests 8.3 per cent of BNPL users were in arrears in August compared with around 7.9 per cent of personal loans and 4.2 per cent of credit cards.
Financial mentors report that when consumers use BNPL to buy essentials regularly such as groceries, this is likely to be an indicator of financial hardship.
MBIE put forward three options for feedback by consumers and the industry, with submissions closing off in mid December.
The first option is to maintain the status quo, but they warned this risked a lack of consistency across the sector which could mean some consumers interests were protected but others were not.
This option would maintain flexibility for the sector to continue innovating but providers may not be sufficiently incentivised to tackle the triggers of financial hardship effectively as there would be no legitimate way to hold the BNPL providers to account for not protecting consumers.
In the second option, the Government could establish incentives for the providers to have an industry code which addresses the triggers of financial hardship.
The industry code would be focused on ensuring consumers are able to afford purchases
and that BNPL was suitable for the needs of the consumer on an ongoing basis, whilst ensuring there was sufficient flexibility for the sector to continue to innovate and provide competition.
This option would also incorporate an ongoing independent review of how BNPL providers are addressing the triggers of financial hardship and protecting the interests of consumers.
MBIE said a code developed by the industry may be better informed by the market and any updates would be easier to implement than changing government regulations.
The cost would also be borne by industry rather than the Government and if the outcomes remain unsatisfactory a review on whether regulation is necessary could incentivise the industry.
But providers would need to be careful the code did not pose competition issues. A voluntary code may also not result in enough protection for the public and it may lack credibility if it relies on self-reporting or self-enforcement.
The third option was to bring BNPL under the current law.
While this could give the Government the ability to design the intervention to adequately address the triggers of financial hardship and result in more trust and confidence from the public, it could also be potentially unworkable for the sector and may mean some providers exit the market.
They also warned it would take significant time and costs to enact and have limited flexibility due to the legislative process.
It would also place a large compliance burden on the sector which could limit innovation and costs were likely to be passed on to businesses or consumers which will increase the cost of borrowing or the cost of the goods purchased.