Insights / December 10th, 2018

ASIC finds that “Buy Now, Pay Later” arrangements are hurting consumers

The total balance of outstanding debt from buy now pay later arrangements has rapidly grown from $476 million in April 2016, to over $903 million in June 2018. ASIC Report 600 Review of buy now pay later arrangements (“Report”) reveals that the buy now pay later industry is influencing the spending habits of consumers, especially younger consumers.

What is a buy now pay later arrangement?

Buy now pay later arrangements are available for a wide range of goods and services, from health services and flights, to everyday purchases from retailers such as Big W and Target. Typically, buy now pay later arrangements work as follows:

  1. The consumer purchases and receives goods or services from a merchant.

  2. The buy now pay later provider pays the merchant for the purchase.

  3. The consumer then enjoys the goods or services immediately, and repays the buy now pay later provider over time.

Providers often charge merchants, and sometimes consumers, for facilitating the buy now pay later arrangement. Consumers may also be liable for missed payment fees, and while not common, some providers charge interest.

How popular are buy now pay later arrangements?

ASIC’s review revealed significant growth in the use of buy now pay later arrangements:

  • Buy now pay later is used by 10% of the Australian adult population. 2 million consumers used it during the 2017-18 financial year, a fivefold increase from 400,000 consumers during the 2015-16 financial year.

  • 1.9 million buy now pay later transactions took place during June 2018, compared to 50,000 transactions during April 2016.

  • It is popular among young consumers. 60% of consumers who use buy now pay later are between 18 and 34 years old.

Why is ASIC concerned?

The consumer protections under the National Consumer Credit Protection Act 2009 (Cth) (“National Credit Act”) do not apply to buy now pay later arrangements. Therefore, providers do not need to hold a credit licence or comply with responsible lending obligations. Of the six providers reviewed by ASIC, only one checked consumers for income and existing debts before providing them buy now pay later services.

From a consumer perspective, buy now pay later arrangements create risks as consumers may be more inclined to buy expensive products that they cannot afford and would not otherwise buy. The Report found that two in five users of buy now pay later services earn under $40,000, and that one in six buy now pay later consumers had become overdrawn, made delayed payments, or borrowed additional money to pay the provider.

What is ASIC’s focus going forward?

ASIC has indicated that it will:

  1. Extend its proposed product intervention powers to buy now pay later arrangements.

  2. Consider whether providers should be required to comply with the National Credit Act.

  3. Monitor merchants’ practice where consumers are charged more for using buy now pay later arrangements.

If you would like more information about the buy now pay later industry, or obligations under the National Credit Act, please contact Hillary Ray.