Buy Now Pay Later regulation needed to protect vulnerable borrowers

Popular BNPL services such as Afterpay, Zip and Klarna are not currently subject to credit product regulation in Australia, such as mandatory credit checks or reporting on missed payments – something the researchers argue needs to change.

Using the 2021 transaction data of 819,415 BNPL consumers from a major Australian financial institution, the researchers sought to understand the spending habits of approximately one in four Australian adults who use these products.

They found the average age of users was 33, 63 percent were women, and they spent 2.35 times as much as men, and about 40 percent of BNPL users have more than one account. 

Those who have more than one account:

• Are more likely to be from a lower socioeconomic area,
• Are more likely to be receiving government benefits,
• Have a higher credit card utilisation rate, and
• Use more personal loans.

Multiple BNPL users thus likely represent higher credit risk for financial institutions and are more likely to experience financial stress.

This was the case for Brittany*, who suffered financial abuse from a former partner and accrued more than $9,000 in debt with a dozen BNPL services.

“I had a poor credit rating, but I was still approved for every provider. I missed so many payments and never received any assistance, just fees,” Brittany said.

Thankfully Brittany was able to have her debts waived after contacting a domestic violence support service – but her experience is one example of the need for greater regulation, according to study co-author Dr Andrew Grant, senior finance lecturer at the University of Sydney Business School.

"So, what people under financial stress tend to do is get to their credit limit, and then they sign up for a Buy Now Pay Later product to get access to more funds. They’re already in financial stress and then they get more credit,” Dr Grant said.

While most BNPL services report low rates of missed payments, Dr Grant said the multi-billion-dollar industry does not exist in a vacuum.

“My previous research has found people have a payment hierarchy, so when they experience financial stress they’re more likely to default on a credit card or personal loan before a Buy Now Pay Later service in order to keep a line of credit open,” he explained.

“But these services have so far only existed in a low-interest rate environment in Australia. Now that interest rates are rising and inflation is biting, we can expect to see more people experience financial difficulty in the year to come.”

Study co-author John Watkins, management consultant in global payments and Honorary Associate at the University of Sydney Business School said the key challenge across the globe is to find balanced regulation to protect the vulnerable and maintain the service that most BNPL consumers enjoy safely.

“Our study found consumers were 2.1 times more likely to hold multiple BNPL accounts when recently maxed out on a credit card, a sign of financial stress. Greater transparency of BNPL credit would create better outcomes for consumers and lenders, but lack of regulation today impedes this much needed transparency.” 

The Australian Government is currently seeking feedback on the future regulatory framework for BNPL arrangements, presenting three options ranging from a strengthened industry code and affordability check to full regulation under the National Consumer Credit Protection Act 2009.

Study co-author David Grafton, financial consultant, and Honorary Associate at the University of Sydney Business School said BNPL should be subject to the same regulation as any credit product.

“Most people use Buy Now Pay Later well. Our study found 77 percent were at very low to low risk of missing three or more payments over the next 12 months. For them, the customer experience is great, so we don't want to throw the baby out with the bathwater,” Grafton said.

"A bit over 10 percent of users are at high risk and having access to unregulated credit, which is only going to make their position worse.

“For the benefit of lenders and consumers, buy now pay later needs to be regulated in line with any other credit product on the market.”

*Surname withheld for privacy reasons

Declaration: The authors declare no competing interests. The research, published in full on SSRN, is shared ahead of peer-review to provide timely input to the Treasury review into proposed BNPL regulation.