Afterpay is on the offensive, as the Government weighs up how it’s going to regulate the growing buy now, pay later (BNPL) sector.
Consumers who use BNPL products can get access to goods or services now, but pay for them later in a series of instalments. While consumers aren’t charged interest, they are charged fees if they fail to meet their payment obligations.
The Ministry of Business, Innovation and Employment (MBIE) is proposing to require BNPL providers to do affordability tests on users seeking to borrow more than $600.
For credit below this threshold, MBIE wants BNPL lenders to do comprehensive credit checks and report back to credit agencies.
However, Afterpay makes the case that the proposed regulations, which fall under the controversial Credit Contracts and Consumer Finance Act (CCCFA), are too heavy-handed.
It wants the $600 threshold to be higher – at $1000 – and says comprehensive credit reporting should be voluntary.
Afterpay’s head of international public policy, Michael Saadat, argues the company has features built into its product that prevent vulnerable borrowers from falling into a debt spiral.
He told the Herald the bulk of the company’s revenue comes from the fees merchants pay to offer its product (which help drive sales), rather than the fees it charges borrowers who fail to meet their repayment obligations.
Afterpay, in its submission to the consultation MBIE ran between December and March, said 95 per cent of repayments were made on time, with 98 per cent of purchases not incurring late fees.
Nonetheless, charity FinCap said the mentoring services it supported had seen the damage caused by BNPL first-hand.
FinCap argued MBIE should require BNPL lenders to do affordability tests regardless of how much someone wanted to borrow.
“The $600 limit has to be addressed,” a financial mentor told FinCap.
“As we know, this is unaffordable for many of our clients who don’t have any spare money at the best of times. Regardless of how the companies try to paint it, this is debt.”
A financial mentor also made the point, “Often two or three people in a household have their own accounts, therefore being able to increase what is bought and increasing the debt for that household.”
Afterpay said BNPL was still “very much in its infancy” in New Zealand, representing about 10 per cent of e-commerce transactions and 5 per cent of point-of-sale transactions in 2021.
It argued suffocating the BNPL sector with regulation would see people turn back to more damaging products, like credit cards.
“Unlike a traditional credit product, Afterpay does not charge interest, and we do not charge default interest if consumers are late,” it said.
“Although we apply late payment fees, these fees are capped at a fair level and can never exceed 25 per cent of the original value of the customer’s order or $68, whichever is less.
“In addition, we freeze a customer’s account as soon as a payment is missed, to prevent the customer from taking on more than they can afford.”
Afterpay opposed MBIE’s proposal around mandatory credit reports, arguing these systems weren’t designed with BNPL in mind.
It said detailed debt serviceability assessments, based on income and expense estimates, don’t cater for very short-term payment products that don’t allow debt to revolve.
Afterpay suggested exempting BNPL lenders from credit reporting if they use PayWatch – a BNPL indebtedness indicator the industry developed with the credit bureau, Centrix.
PayWatch alerts BNPL providers if a new applicant has an active overdue account with another provider.
Nonetheless, Afterpay said a BNPL provider could still choose to lend to such applicants.
It believed the fact PayWatch provides information in real-time and captures younger adults with “thin or blank traditional credit files with the credit-reporting bureaus” makes it better suited to BNPL.
Coming back to FinCap, it worried there wasn’t a clear requirement around what a BNPL lender should do if it saw an applicant had an overdue account with another provider.
It worried the proposed $600 threshold (below which an affordability test wouldn’t be required) could be multiplied by three or four BNPL lenders.
“This could quickly see a whānau in substantial hardship have it compounded by $2400 of debt without an affordability assessment taking place,” FinCap said.
“Relative to the lowest base net weekly income rate of $180.91 for a Jobseeker Support income, $600, let alone $2400, is a ridiculous amount of debt to service.”
Jenée Tibshraeny is the Herald’s Wellington Business Editor, based in the parliamentary press gallery. She specialises in government and Reserve Bank policymaking, economics and banking.