Buy now pay later lenders scramble for survival

They were touted as the next big thing for the retail landscape, freeing shoppers from the burden of interest-bearing credit cards.

But now many buy now, pay later lenders are struggling financially, even before the Government announces its plans to regulate them.

The rapid growth of small, interest-free consumer buy now, pay later (BNPL) loans has gathered a million users in New Zealand, but the massive popularity of BNPL loans has not translated into massive profits.

Humm Group is retreating from the market, while Zip and Laybuy are cutting costs, and jobs, in a bid for profitability. The number of borrowers falling behind on payments and being stung by late fees is growing.

In the face of planned regulation around the world, the sector is scrambling to take matters into its own hands.

But it has also so-far failed to put in place the cornerstone of its self-regulatory hopes: the “indebtedness indicator”, which it said last year could be in place as soon as the first three months of this year.

This indicator would flash red alerting BNPL lenders when someone applying for an account had an overdue account with another BNPL lender.

It would prevent people already failing to make payments from opening new BNPL accounts, but was not intended to prevent people with multiple accounts from borrowing on one, despite being behind on another.

Critics say the indicator would fall short of more time-consuming and costly credit checks, which show whether people are behind on any loan or utility payments, giving a more complete picture of whether they could cope with more debt.

But despite the threat of regulation by the Government, mirroring moves in the UK and Australia, Michael Sadaat, vice president of global regulatory affairs at Afterpay, says the indebtedness indicator is still some months away.

“We’re very close to going live with that. We’re in the final stages of implementing that from a technology perspective,” Saadat says.

While most people cope with their BNPL loans, financial mentors say BNPL loans are being given to people who can’t afford to pay them back, plunging them into financial hardship.

Saadat does not accept that smaller BNPL loans are the root of such hardship, claiming it is larger loans like car, and personal loans, that are the real problem.

But mentors say desperate people can lump BNPL loans on top of their already crushing debts, tipping them into a debt spiral.

Jeremy Cooper, financial mentor in Auckland, is sick of seeing struggling people able to get multiple BNPL loans.

One of his clients is on supported living, and has three children.

“Total income $839 a week. Pays $150 a week rent for social housing. Existing loan repayments $500 per week before BNPL,” he says.

She had a $1000 limit on one BNPL account, and $1500 on another, he says.

When added to existing car loan debt and rent, the BNPL loans took her expenses to 109% of weekly income, and that was before food, power phone and other essentials, Cooper says.

BNPL should have identified her indebtness, and refused to lend to her, he says.

Cases like this are an exception, BNPL lenders say, but Saadat says Afterpay now expects the Government to regulate the sector.

But Afterpay, like rival BNPL lender Laybuy, is calling for regulation to be “proportionate” so BNPL does not have to change its business model to raise more revenue to cover the costs of regulation.

Regulation should not come at such a high cost it threatens BNPL’s interest-free status, Gary Rohloff, founder of Laybuy argues.

“There should be rules around credit checking and reporting, marketing, independent complaint processes and obligations to support customers in hardship,” Rohloff says.

This echoes plans for regulation in the UK, which has accepted BNPL needs lighter regulation than interest-bearing loans.

The UK has three main areas of concern:

• The inappropriate promotion of BNPL to consumers, with lenders promoting them as a payment option, rather than loans.
• Lack of affordability assessments, check people’s credit reports before lending to them, and failing to log payment information on people’s credit files.
• Inconsistent treatment of customers in financial difficulty.

The last is a reference to how hard it is for people in financial hardship to contact BNPL lenders, whose businesses are heavily automated.

Jake Lilley, senior policy adviser at Fincap, says financial mentors are seeing clients with problematic BNPL debts every day.

“We’re seeing situations where lending is made that was always unaffordable, and was always going to get whānau into a debt trap,” he says.

In extreme cases, people have a dozen BNPL loans.

Lilley says BNPL should be bound by the same “safe” lending rules for other kinds of loans, which means credit checks and affordability assessments.

But Christine Liggins from Debtfix, a charity which helps people navigate out of crushing debt, says there is little margin in BNPL lenders’ businesses, which makes most of their money from fees paid by shops for accepting BNPL.

After Commerce and Consumer Affairs Minister David Clark’s responsible lending law changes late last year were accused of creating an artificial credit crunch, Liggins does not think the Government will want to be accused of spoiling BNPL with excessive regulation.

She expects lighter-touch regulation of BNPL.

This could include limits on how many BNPL accounts a person can have, preventing people from stacking BNPL loan on top of BNPL loan.

It could also require affordability checks on BNPL loans with higher credit limits.

There could even be some harm reduction bans on what BNPL could be used for following an outcry over Afterpay signing up bottleshops so people could buy grog on BNPL.

Afterpay will not allow its BNPL loans to be used to buy guns and gambling, but some like Laybuy would be happy to see regulations banning people from using it to buy alcohol, which led Clark to comment that the move did nothing to build Afterpay’s social licence.

Liggin’s assessment of the low-margin nature of BNPL appear to be borne out by their financial struggles.

Financial disclosure on the Australian ASX sharemarket indicates BNPL lenders see reducing fraud losses, and bad debts, as key to profitability.

ASX-listed Laybuy, which has 315,000 “active” customers in Australia and New Zealand (down from 324,000 the December) has announced a “major cost reduction” will cut a third of staff, meaning 45 redundancies, most from its Auckland office.

ASX-listed Zip has announced a restructure, cost-cutting, the closure of some overseas operations, and crackdown on borrowers who have not paid their accounts, in a bid to achieve profitability.

There’s no saving the New Zealand BNPL loan operation of ASX-listed Humm Group, which is closing it to focus on its profitable interest-bearing store cards.

Source: Stuff.co.nz