Debt traps created by buy now, pay later schemes are being addressed through new affordability checks with the intention to stop vulnerable people from getting into a “spiral of debt”.
It follows calls for regulation from business and health advocates who say the schemes could lead to increases in family violence, drink-driving, health problems and gambling.
Buy now, pay later (BNPL) services allowed users to make purchases on credit. Usually, 25 per cent of the total price was paid upfront and the rest in three timed installments. Interest was not charged but users could face late fees if they did not keep up with payments.
It was a popular phenomenon for Kiwis - the amount of money spent through such schemes in New Zealand was $1.7 billion in 2021, up from $755 million in 2020.
The Ministry of Business, Innovation and Employment sought public feedback on the benefits and costs of BNPL a year ago, which led to today’s Government announcement that affordability checks would be applied to some BNPL loans.
Under the proposal, the checks would be necessary for loans above $600, giving borrowers a similar level of protection to those using other credit contracts, such as credit cards and loans.
As the global cost of living crisis puts pressure on New Zealanders and their families, we are taking action to help them avoid unmanageable debt, especially as the Christmas season looms,” Commerce and Consumer Affairs Minister David Clark said.
“While for many, BNPL can be a useful way to spread the cost of large household purchases, we are trying to stop vulnerable people getting into a spiral of debt if lenders allow them to take on more than they can afford.”
Comprehensive credit reporting would be required for smaller loans under the threshold, which was yet to be confirmed.
All BNPL providers would need to have hardship processes to support those who found themselves behind on payments, and belong to a dispute resolution scheme. Directors and senior managers would also need to be certified fit and proper by the Commerce Commission.
BNPL has been designed in a way that was not currently subject to the consumer protections in the Credit Contracts and Consumer Finance Act 2003. The new regulations would be developed with the aim to treat BNPL as a consumer credit contract under the CCCFA.
Consultation on the proposal’s detail, such as the threshold and what would occur for loans above it, would commence later this year. It was intended final regulations would be made in 2023.
Ruth Smithers, chief executive of financial mentoring service provider FinCap, said the regulations were a “huge step forward” to address BNPL lenders that pulled in a quarter of their revenue from late fees and sending whānau into unfair debt collection, Smithers claimed.
“It is great to see some action that should take the most egregious lender conduct out of this rapidly growing market,” she said.
She did consider the $600 threshold to be too high.
“We will keep working closely with financial mentors to understand the impact of the changes, and we will continue to call for the Government to close all loopholes.”
In July, the owner of Auckland liquor shop Panmure Bottle O’ came under fire for his decision to allow people to use BNPL provider Afterpay to buy alcohol.
Within hours of the Herald’s reporting on the move, the store said it would no longer accept that form of delayed payment for alcohol.
Store management said they were “reviewing our policies” and that “hence, until further notice Afterpay will not be accepted as a method of payment in our store with immediate effect”.
Te Arawa iwi justice representative Billy Macfarlane told the Rotorua Daily Post last year that increasing alcohol accessibility could, in his opinion, lead to more drugs, gambling and abuse.
He said money governed how much you can drink.
“If you went to the bottle store and you only had $30 on you, you can only buy $30 worth of alcohol. If you got a buy now pay later scheme you can just buy more alcohol and you can get yourself in a worse state.”
Salvation Army head of social services Lynette Hutson, also speaking to the Rotorua Daily Post, feared BNPL schemes becoming prevalent in the alcohol industry could increase family violence, drink-driving, health consequences, broken relationships, debt and gambling.
While members of the business community recognised its value, some were concerned about how widely BNPL schemes were applied
Bay Financial Mentors manager Shirley McCombe told the Bay of Plenty Times in August that the use of the services to purchase alcohol concerned her, especially for those who lived with addiction.
She said the sector had “huge concerns” about clients accumulating debts on buy now, pay later services.
Alcohol Healthwatch executive director Dr Nicki Jackson said alcohol was New Zealand’s most harmful drug, so effective safeguards needed to be in place.
BNPL schemes took alcohol accessibility to a new level, especially online, she said.
“Low upfront prices for alcohol are attractive for many groups sensitive to the price of alcohol, including low-income drinkers and young people. These are also groups that experience significant harm from their drinking.”