This post has been contributed by Professor Therese Wilson, Dean of Law and Head of School and a member of the Law Futures Centre.
For many decades now, across multiple jurisdictions, there has been discussion about small amount, short term credit products such as payday loans, and their potential harm for vulnerable consumers. This has largely been due to high interest rate charges which can lead consumers into a debt spiral when loans cannot be repaid within the short loan period and need to be rolled over. This has now been addressed through ‘special rules for short-term and small amount credit contracts’ found in Division 7 of the National Consumer Credit Protection Act 2009 (Cth).
While “Buy now, pay later” (BNPL) products such as Afterpay do not impose any interest rate charges upon consumers who are able to pay the purchase price in fortnightly instalments, there is a risk that consumers will have to pay late fees if they are late to make payments. Because BNPL products do not charge interest, they are not defined as credit, and are not subject to the provisions of the National Consumer Credit Protection Act. This means that they are not subject to the responsible lending obligations under section 118 of the National Consumer Credit Protection Act, which requires a lender to assess a credit contract as unsuitable for a consumer if, among other factors, the consumer will be unable to comply with their financial obligations under the contract or could only do so with substantial hardship. While there are current moves afoot to amend the application of responsible lending obligations under the National Consumer Credit Protection Amendment (Supporting Economic Recovery) Bill 2020, which is before the Senate at the time of writing, those amendments would not impact obligations with respect to small amount credit contracts or consumer leases, which would seem to be the credit products which bear the closest resemblance to BNPL schemes.
An aspect of BNPL contracts that poses potential harm for consumers is the fact that a consumer may have entered into a number of these contracts without the BNPL provider having to make any enquiries to ascertain the significant debt burden already being carried by the consumer. Nor would there need to be any enquiry as to the consumer’s financial position more generally, to ascertain whether the consumer will be able to meet obligations under the BNPL contract without substantial hardship.
The other troubling aspect of BNPL contracts is the business model of providers which relies upon the generation of profit from late fees, analogous to the payday lending business model which relies on defaults and loan rollovers.
Where low-income consumers find themselves entering into multiple BNPL arrangements, they will be focused on using their income to meet debt repayments without any ability to save in order to pay for goods and services ‘up front’. Their financial struggle thereby becomes entrenched.
BNPL products may in many ways be safer than credit cards for some consumers and may also address financial exclusion for those consumers who cannot otherwise access credit to buy essential goods and services. This is also an argument that has been made in support of payday loans. Nevertheless, there is an argument to be made that, given the potential harms of these products for vulnerable, low-income consumers, there should be a more robust regulatory framework around BNPL products, at least including responsible lending obligations.
There is a tension between regulatory approaches which emphasise consumers being responsible to protect themselves as part of a free market, and those which recognise structural disadvantage and vulnerability as giving rise to a need for more interventionist regulatory measures. I argue that at the very least there should be a regulatory focus on minimising the potential harms that have been shown to arise in relation to some products, including BNPL. The 2019 Parliamentary report on Credit and Financial Services Targeted at Australians at Risk of Financial Hardship noted the submission by Good Shepherd Microfinance that the majority of applicants for their microfinance products had multiple BNPL products, including one applicant whose bank statement showed 288 BNPL transactions totalling $5,600. The report also noted that BNPL products were an emerging cause of bankruptcy.
Imposing responsible lending obligations on BNPL providers would not only provide some protection for consumers, but would also minimise harms to the broader economy, given that over-indebted consumers cannot meet rates and tax obligations and may become a drain on legal, health and social welfare systems.
Regulating to require BNPL providers to offer their products responsibly would impact positively on individual over-indebtedness and reduce adverse effects of over-indebtedness on the national economy.