Called BNPL in the financial industry, and often just Afterpay, after the industry leader, by consumers, buy now, pay later enables buyers to spread the cost of a purchase in four interest-free instalments.
You’re charged extra only if you miss payments, as a profitable chunk of customers do. BNPL works well for some people, but is sucking others hopelessly into debt.
Afterpay and Zip are common in New Zealand and international fintech Klarna has just bought out Laybuy, another provider. What you can buy with this form of credit is almost limitless. It’s in nearly every shop.
Like another popular modern invention, vaping, BNPL was seen as harmless in the early days. But more and more research is emerging showing the damage it can do in the hands of vulnerable New Zealanders.
Auckland University of Technology economics and finance head of department Aaron Gilbert laughed momentarily when asked if there were any positives about BNPL in local or international research. BNPL helps with financial inclusion, Gilbert says. People who might not otherwise be able to use credit to buy essentials can buy them with BNPL. The alternative for many is loan sharks.
Just like vaping, more and more research is emerging about the downsides of BNPL. Two groups in particular are worst affected by the downsides of BNPL: young adults and low-income earners, he says.
Gilbert and former colleague Ayesha Scott concluded last year in their own research that BNPL should be seen as debt. “Buy now, pay later providers never use the word ‘debt’ or ‘credit’. They use ‘repayments’. This is really having an impact on the way consumers are using [BNPL].”
When Gilbert reviewed the literature in August he saw two issues jumping off the pages over and over again: buy now, pay later feeding into impulsive buying behaviour, and impulsiveness combined with materialism leading to problem debt.
“For those people who are more prone to impulsive buying anyway, buy now, pay later makes it very, very easy.” People who tend towards materialism and impulsiveness are correlated with those who have problems with BNPL, he says.
“The other thing that seems to be coming through is that impulsiveness and that materialism are leading through to problem debt.”
What happens is consumers have multiple BNPLs with one or more providers, and sooner or later they either default on payments, resulting in charges, or they refinance on to an overdraft or credit card that charges high interest.
“It doesn’t really help if buy now, pay later is interest-free if you’re then using a 25% interest credit card to pay off your buy now, pay later,” says Gilbert.
“There are a few studies [from Stanford University and others] that have shown that buy now, pay later is resulting in more overdraft charges, more credit card interest, which is a pretty good indicator that people are not using buy now, pay later well.”
One study Gilbert reviewed found the BNPL companies marketed themselves as being more responsible than other lenders. But that isn’t what it seems. “[The providers] have recast the idea of responsible consumption as being repaying your buy now, pay later on time rather than only using debt when you actually need it,” he says.
BNPL is a profitable business and the companies market it hard and are gamifying their offerings. For example, customers might step up to a new loyalty level if they make payments successfully. An Australian example cited by Gilbert is that repeat customers who reach a certain loyalty level don’t have to make the first instalment until two weeks after purchase, rather than on the day.
BNPL is lightly regulated compared with other forms of credit here. The Government brought BNPL under the Credit Contracts and Consumer Finance Act (CCCFA) from the beginning of this month.
Sorted.org.nz personal finance lead Tom Hartmann says while BNPL has some benefits, there are also risks.
Using it to spread an essential purchase interest-free over four weeks can be smart. However, people get into most trouble with BNPL when they have multiple buy now, pay later purchases on the go at the same time, says Hartmann.
He says it gives people the licence to be impulsive on the fly because they’re able to pay for things that they perhaps would otherwise need to save up for.
