As large creditors tighten their lending criteria, consumers and businesses – especially SMEs and sole traders – are turning to a wider array of lenders that offer high-risk products, including buy now, pay later (BNPL) services, which may place users in unmanageable debt situations.

The trend represents a significant shift in consumer behaviour, with 380 million users globally accessing BNPL platforms. In Australia alone, the popularity of these services is particularly pronounced among younger demographics: a survey revealed that in July 2024, 59% of gen Z and gen Y respondents reported using BNPL within the previous six months.

Tim Beresford, chief executive of the Australian Financial Security Authority (AFSA), warns that it's important for people to be aware of the risks behind BNPL products as they can carry high costs, and some business operators do not act in a socially responsible way.

“There has been a significant contraction in the unsecured credit market, with non-housing personal credit falling from 15% of GDP in 2008 to 6% last year,” he says.

“As large providers have reduced their unsecured credit exposure for commercial reasons, there has been a shift in the mix of businesses offering unsecured products. There has also been a shift in the product mix, with the emergence of higher-risk products such as payday loans and buy now, pay later agreements.”

Additionally, a 2022 survey by not-for-profit Good Shepherd found 84% of its financial counselling and capability practitioners reported that their disadvantaged and vulnerable clients had tried to manage existing BNPL debt by opening additional BNPL accounts. The survey also showed about 73% of practitioners said clients have missed essential payments or cut back on essentials to service BNPL debt.

Working with clients

According to CreditorWatch, late payments are at their highest rate since the end of JobKeeper in March 2021, as more businesses struggle to pay outstanding invoices. The rate of B2B payments more than 60 days in arrears is up 21.4% year on year and 7.9% since January.

When advising clients considering high-risk products like BNPL, it's essential to evaluate their impact on cash flow, debt accumulation, and credit ratings. Advisers should ensure clients understand hidden fees, interest rates, and the potential for financial strain, says Jill Muir, senior policy advocate, business reform, at CA ANZ.

“If used as they are intended, BNPL can be an efficient cash flow tool for a business. The key is to do your homework and plan the repayments, so you do not miss one. A missed repayment attracts penalty interest, which accumulates rapidly and can quickly spiral into unmanageable debt,” she says.

Deb Shroot, financial counsellor and consumer advocate at Financial Counselling Australia (FCA), suggests people should take a cautious approach if their clients are accessing BNPL products. “Firstly, they should question why their clients are using BNPL in the first place,” she says. “Is it because they cannot afford to pay for it in any other way? If this is the case, are they able to repay it at all?”

Better protection on the way

Consumer advocates warn that some companies exploit loopholes in consumer law and regulations, and the BNPL model further reduces the barriers to using poorly regulated loans at any place that accepts Apple Pay or Google Pay – including supermarkets.

“Many people may assume that BNPL is regulated when in fact it is not. It falls outside the credit code and other responsible lending legislation. This will change when the federal government introduces long-awaited reforms,” says Shroot.

• Amend the Credit Act to require BNPL providers to hold an Australian credit licence.
• Require operators to comply with existing credit laws, regulated by ASIC.
• Establish a new category of "low-cost credit" under the Credit Act.

As Stephen Jones, Assistant Treasurer and Minister for Financial Services, said when announcing the intended reforms in June 2024: “If it looks and acts like credit, then it should be regulated as such.”

How does buy now, pay later work?

Buy now pay later (or BNPL) works by offering customers small loans instantly, designed to be paid back in interest-free instalments. Users sign up with their debit or credit card, receive an account limit, and follow a fixed repayment schedule for future purchases.

What buy now pay later providers are available in Australia?

There are several providers in Australia, including Afterpay, Zip, PayPal, Pay in 4, Klarna, Payright, Brighte, and humm. These businesses are part of a 200+ global group offering instalment loans at checkout.

Does buy now pay later affect your credit score in Australia?

Yes. From this year, BNPL products will fall under the National Credit Act, requiring providers to perform credit checks. This results in credit enquiries on your report, potentially impacting your credit score. Missed or late payments will also appear on your report.