There is an old saying that if something looks like a duck and quacks like a duck, it's a duck.
A recent phenomenon is the rise and rise of buy-now, pay-later services. This no-questions-asked approach to consumer finance covers clothing and apparel purchases, dining out and even holidays, and is proving extremely popular among millennials in particular.
The argument is this is not consumer credit, and therefore does not require the usual checks to ensure the buy-now, pay-later user can afford the cost of repayment.
The Commerce Commission has given credence to this argument in determining that, because no interest rate is applied, buy-now, pay-later schemes do not fall within the ambit of consumer credit legislation.
Because I have worked in the finance industry for many years, I can say with authority that this stance is garbage. There are numerous examples that refute the regulator's position, such as the old zero-coupon bond (or accrual bond), a method of finance which involved a bond being sold at a discount to its value but which did not have an interest payment like a typical bond.
The discount equated to the interest rate that would be otherwise applied. There was no argument that this was not credit finance. Similarly sharia finance, which prohibits charging or paying interest, is nonetheless regarded as a form of credit and is subject to legislation.
Under buy-now, pay-later, the interest coupon is in effect covered by the retailer via a fee / discount to the price of the goods or services being purchased.
In that case it is little different to the structure of a zero-coupon bond. The buy-now, pay-later lender also charges a late fee when a payment is missed, and while this is not interest the fee often represents a significant percentage of the original cost.
A failed fee of 20 per cent of the asset purchased (when annualised) would still represent an implied interest rate running into hundreds of per cent.
There is increasing evidence that default rates for this form of payment are rising, especially among the young. This can only worsen as inflation increases and more pressures are placed on personal budgets.
Though the buy-now, pay-later industry argues that such defaults will not affect individuals' ability to borrow in the future, the evidence does not support this.
Usually there is a requirement to provide a credit or debit card to the buy-now, pay-later lender from which the payment can be drawn.
Consequently, while a failure to pay may not be recorded as a credit default by the provider, the banking system will recognise that default, causing the consumer (probably unwittingly in many cases) to risk their credit record.
There is another worrying aspect to this. The banking industry, while restricting lending to individuals as credit controls tighten, appears far too eager to provide funding facilities to buy-now-pay-later companies.
Far from protecting themselves from potential credit losses, they are merely putting another entity – one which conducts no credit checks – between themselves and the same underlying exposures.
Therefore, any significant increase in defaults will flow through to the banking system. Remember, the global financial crisis had its genesis in lending practices such as Ninja (no-income-no-job applications) loans. This is no different.
Belatedly we are seeing regulators, including our own, take notice and start to question the buy-now, pay-later model and risks. The problem, of course, is too many businesses are now addicted to this sort of credit, notwithstanding its comparatively high cost to them as a percentage of a sale.
On the consumer side, aside from the obvious risks associated with this form of "credit", the whole model encourages individuals to buy more than they would otherwise. It is not difficult to see that it provides a further incentive to consume more than is necessary or than people can truly afford.
Governments around the world are under pressure to urgently impose changes and incentives to reduce carbon emissions.
A key contributor to the activity that drives global temperature rise is over-consumption, meaning that tools such as buy-now, pay-later need to be viewed through the lens of climate protection as well as consumer safety.
And at the same time, governments including our own are under pressure to solve the worsening housing unaffordability, especially for first-home buyers.
This has been driven partially by historically low interest rates, which have inflated capital values and simultaneously spawned financing models like buy-now, pay-later, which would have difficulty operating in normal interest-rate environments.
This is because the formula which sets a) the late fees and b) the period over which the borrower can spread payments is determined by the underlying interest rates which the buy-now, pay-later lender is able to secure from its own financiers.
That all this has escaped the attention or concern of our financial regulators is nothing short of gobsmacking.
Back to the duck. The buy-now, pay-later model gives you something now that you pay for later. That is credit. Interest is payable in the form of late fees and the charges to businesses. Credit again. It's a duck.
Which leaves us with a problem. The time that has elapsed from the model's introduction in New Zealand and regulators waking up to their responsibility has been filled by businesses and consumers becoming accustomed to, even dependent on, buy-now, pay-later.
It is going to be extremely difficult to put this particular genie back into the bottle. The damage to both the financial system and individual credit has already been done.