Is buy now, pay later a modern debt trap?

For Leash Sullivan, a single mother who lives in Adelaide, the past year has been tough. She works in hospitality and events and saw her hours greatly reduced during the coronavirus pandemic, which meant she increasingly had to rely on government support payments through JobSeeker.

When a particularly high electricity bill comes in, or when she needs a new vacuum cleaner or a fridge, Ms Sullivan turns to buy now, pay later (BNPL) services to avoid paying it all at once.

“You get all these bits and pieces and it just adds up at the end of the day and you don’t realise … it adds up and leaves you a little bit short,” she says.

When the BNPL debts come in later in the month, Ms Sullivan says she sometimes skips out on essentials to make the repayments.

“I’ll just buy less food for myself. I have a son so I make sure he is fed, but I’ll just cut out on meals and stuff for me. I always make sure he has his meals,” she says.

Australians in financial distress
Ms Sullivan’s experience is far from unique. Financial Counselling Australia CEO Fiona Guthrie says that while calls for financial assistance through the National Debt Helpline dropped off last year due to high levels of government support, they are back on the rise again now that much of the support has been withdrawn.

“It’s a bit like a U, so we’ve got to the bottom of the U and the calls are going back up to where they were. Face-to-face services – about half of them – are reporting demand at the same level as before the pandemic,” says Ms Guthrie.

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CHOICE spoke to three financial counsellors, who work on the frontline, and they say financial products such as BNPL are increasingly being used to plug the gaps for vulnerable people who are struggling to make ends meet.

Zack Wildy, a financial counsellor based in Cairns, says a third of all clients he sees have at least one BNPL debt. Many have multiple BNPL accounts.

“In terms of vulnerable people, we are seeing BNPL used by people who are under pretty severe financial hardship, because there are no credit checks or the credit checks they do are pretty lax,” Mr Wildy says.

“Nine out of 10 customers might use BNPL effectively and healthily, but then there is that one person you see who is in real trouble.”

BNPL providers – the biggest in Australia are Afterpay, Zip and Humm – have been around for years and offer customers ‘interest-free’ finance to shop now and pay the money back in instalments later.

Their growth in the marketplace has exploded. The most recent report from the Australian Securities and Investments Corporation (ASIC) into BNPL providers showed the total value of transactions increased by 79 per cent, from $3.1 billion in the 2017-18 financial year to a whopping $5.6 billion in the 2018-19 financial year.

Transaction values in the second half of 2020 grew by more than 50 per cent for some major BNPL providers compared to a year earlier.

Market leader Afterpay’s annual income in its half-yearly 2021 report was $374 million – up 108 per cent on the previous year. In August 2020, it reported 103 per cent growth on the previous year.

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Zip promotes its ability to be used anywhere that accepts a Visa contactless payment with flashy advertisements featuring tennis player Nick Kyrgios alongside social media influencers.

BNPL providers sell themselves as a budgeting tool and not as a way to make ends meet for vulnerable people. But a nationally representative survey conducted in September 2020 by CHOICE suggests they are not being used as a budgeting tool by many Australians.

It found a little over one in 10 Australians (12 per cent of respondents) had used a BNPL service in recent months to cover a cash shortfall until payday.

The risks of BNPL
Despite not charging interest like traditional forms of credit – such as credit cards or high interest payday loans – the model of BNPL providers isn’t without its risks.

The ‘paying better’ interest-free model of market leader Afterpay can quickly turn into relatively high levels of interest-equivalent fees if you miss a scheduled repayment.

For example, a single $10 missed payment fee charged by Afterpay on a $50 purchase is equivalent to a 20 per cent interest rate. That late fee goes up by $7 if the amount remains unpaid for seven days after the due date.

According to the 2020 ASIC report, one in five BNPL customers surveyed had missed a repayment in the past 12 months, with 47 per cent of those being 18-29 years old.

ASIC also found that 20 per cent of consumers had missed out on essentials such as meals in the past 12 months in order to make their BNPL repayments, while 15 per cent of consumers surveyed said they had taken out an additional loan.

Afterpay made less than 9 per cent of its income from late fees in 2021, down from 20 per cent just a few years earlier. But while the percentage might have dropped, the amounts are still going up.

In the second half of 2020, Afterpay reported its total income from late fees was $35.1 million, compared to $32.6 million for the six months just prior, showing collecting from customers who struggle to make repayments is still part of their business model.

Financial hardship
A July 2020 joint report from Financial Counselling Australia and state and territory financial counselling associations highlights how the hardship policies of BNPL providers fall well below the standard of traditional non-fintech lending providers.

They asked financial counsellors to rank the financial hardship policies of major bank and non-bank lenders on a scale of one to 10, with all of the big four banks performing better than all of the BNPL providers.

Even the best ranked BNPL provider, Afterpay (with a score of 4.8 out of 10), performed worse than almost all rated debt collection agencies on how accommodating their policies were for people in financial hardship.

Julia Davis, senior policy officer at the Financial Rights Legal Centre, says they recently conducted a desktop audit of BNPL providers’ financial hardship contact details and found in some instances the customer had to make more than seven clicks on their webpage before finding hardship information.

Some providers had no hardship information available on their website at all.

“As people who have worked in the debt space for decades, we see a lot of red flags,” says Ms Davis. “These companies are absolutely encouraging people to spend money they don’t have. It’s a bit of a debt trap.”

Industry responds
Because BNPL providers don’t charge interest, they sit in a regulatory loophole where they don’t have to comply with the National Credit Code and the responsible lending regulations and financial hardship policies that come with it.

The industry is subject to ASIC’s product intervention powers and the ACCC has previously written to merchants about concerns of surcharging on BNPL transactions.

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The Australian Financial Industry Association (AFIA) – the industry lobby group representing major players in the BNPL market – says its recently released voluntary code of conduct will ensure best practice for consumers when it comes to responsible lending and financial hardship.

“The code requires BNPL providers to be proactive in offering hardship assistance for customers experiencing financial difficulty,” an AFIA spokesperson told CHOICE.

They said that less than 1 per cent of BNPL customers had requested financial hardship assistance from their BNPL provider, even at the height of the pandemic. 

“The code sets best practice standards for the sector and strengthens protections for customers, while preserving customer choice to make purchases and payments in a way that suits their needs and preferences,” the spokesperson said.

CHOICE says it will further examine the industry code of conduct and consumer groups’ calls for further regulation.

If you need help tackling your debt, call the National Debt Helpline on 1800 007 007 for free, confidential and independent information and advice. For more information on buy now, pay later services, go to This article was originally published here.

Have you used buy now, pay later services? Were you able to do so without falling into the ‘debt trap’? Why not share your experiences in the comments section below?

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