Is ‘buy now pay later’ good or bad?

BNPL – buy now or pay later

‘BNPL’ or buy now or pay later schemes have become an alternative to cash and credit cards. Is this largely unregulated internet phenomenon good or bad?

This is an opinion piece spurred by readers who see BNPL – buy now or pay later – schemes everywhere. These include the local bottle shop and supermarkets to high-end retail, travel, uber-expensive luxury goods, and pay for home renos and sales staging. To be clear – this is not qualified financial advice and perhaps flavoured by my upbringing and ethical investing.

I am a child of 50s. It was a case of you either having the cash or saving up to buy something apart from a house. To segue, we owned a retail store and offered good old-fashioned layby. It allowed people to pay a deposit to ‘lay the goods by’ (to guarantee you got them) and pay them off over a few months. We loved layby because more than 30% of people defaulted on payments. We kept the goods to resell and all the payments made. It was our ‘little book of gold’.

BNPL is just a rehash of layby. Except that you get the goods upfront and take far higher risks if you default.

Growing debt

BNPL is now the nation’s fourth-largest source of personal debt. The NAB report (it is a PDF, so remember to check your downloads folder) reveals that 18% of Australians use BNPL. (Credit Cards are 41%, home loans 34% and personal loans make up 19%).

Of the 18% that use buy now or pay later:

  • Only 5% are over 65
  • Instant gratification groups 18-29 (26%) and 30-49 (24%) love it
  • 49% have two or more accounts with different BNPL providers.

BNPL’s use is as follows:

  • Clothing (45%)
  • Household items like furniture (40%)
  • Children’s goods (16%)
  • Automotive (14%)
  • Food (12%)
  • Hair and beauty (12%)
  • Travel and holidays (10%)
  • Entertainment (10%)
  • Jewellery (10%)
  • Phone and internet (10%)
  • Sport (7%)
  • Pets (6%)

This type of payment adds to the other forms of unregulated* debt/loans (rentals, layby, payday, family and friend) and regulated (personal, investment, credit card). In terms of repayment, 46.1% of users had issues. NAB calls this ‘moderate’ levels of difficulty with an average of 37% (mainly 18-29 men [59%] and women [41%]) missing paying instalments on time.

* ‘Unregulated’ means not regulated by Australian Prudential Regulation Authority and the National Credit Code. Some BNPL providers have agreed to a relatively innocuous voluntary ‘Code of Practice’ co-drafted with ASIC.

What happens if you miss a payment?

We point out that like the ‘little rivers of gold’ from layby payment defaults, BNPL makes much of its money the same way. Those that don’t meet obligations the first time face stiff fees or charges. Do it again, and it is repossession and debt proceedings.

While each BNPL provider has slightly different terms, payments are usually automatically deducted from your bank account. A ‘default’ means that you have insufficient funds in the bank account. At a minimum, you will incur dishonour penalties. Then there is the raft of BNPL penalties like account keeping, late fees, and some interest charges on the full price, etc. This last form of debt default is amongst the worst. Why? It affects your credit rating and your ability to get regulated loans.

GadgetGuy’s take

We can’t tell you that BNPL schemes are poison – after all, according to NAB, nearly 60% use them responsibly. I regrettably venture that this figure, hopefully post any other COVID lockdowns, will reflect much higher debt stress as the economy slows and money runs out from Job Keeper supplements etc.

Looking at the share prices of Afterpay, Klarna et al., AfterPay is hugely successful for a company offering ‘no-interest’ money and is now valued at A$34.25B. Swedish-based Klarna (now in Australia) is worth US$45.6B on paper – more than the ANZ Bank!

Last year we wrote Don’t succumb to the deadly After-Pay virus. It is reassuring to see that the 24% of its defaults in the 2019-20 year are now down to 19% (Source), but that is on sales of A$11.1B (up 112% from $5.2B in 2019). While some companies are doing well, there are now 12 more BNPL – buy now or pay later schemes that may not be under as much scrutiny as this publicly listed company. And there are dozens of unregulated niche players offering everything from cars to home renos playing for much bigger stakes.

We repeat the sage advice – if you don’t have the funds, don’t use BNPL or other unregulated loan schemes. Have a read of Scott Pape (Barefoot investor) Why Afterpay is the marijuana of credit.

If you are in financial hardship, call the National Debt Helpline on 1800 007 007. Talk to or set up an appointment with a community-based, not-for-profit financial counsellor. They are free, confidential, and the unsung heroes of the financial world.