Harmful ‘Buy Now, Pay Later’ Debt Traps Targeted in New Government Checks

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Debt traps created by buy-it-now, pay-later programs are being addressed with new affordability controls in an effort to prevent vulnerable people from going into debt.

This follows calls for regulation from businesses and health advocates who say the programs could lead to an increase in domestic violence, drunk driving, health problems and gambling.

The Buy Now, Pay Later (BNPL) services allowed users to make purchases on credit. Usually 25% of the total price was paid upfront and the rest in three timed installments. No interest was charged, but users could face late fees if they failed to keep up with payments.

It was a popular phenomenon for Kiwis – the amount of money spent on such schemes in New Zealand was $1.7 billion in 2021, up from $755 million in 2020.

The Department for Business, Innovation and Jobs sought public comment on the benefits and costs of BNPL a year ago, leading to the government’s announcement today. today that accessibility controls would be applied to some BNPL loans.

According to the proposal, checks would be required for loans over $600, giving borrowers a level of protection similar to those using other credit agreements, such as credit cards and loans.

As the global cost of living crisis puts pressure on New Zealanders and their families, we are taking action to help them avoid unmanageable debt, especially as the Christmas season approaches,” said Trade and Consumer Affairs Minister David Clark.

“While for many BNPL can be a useful way of spreading the cost of large household purchases, we try to prevent vulnerable people from going into debt if lenders allow them to take on more than they can afford. .”

Trade and Consumer Affairs Minister David Clark.  Photo/Mark Mitchell
Trade and Consumer Affairs Minister David Clark. Photo/Mark Mitchell

Full credit reports would be required for small loans below the threshold, which had not yet been confirmed.

All BNPL suppliers should have hardship processes to support those who have found themselves in arrears and belong to a dispute resolution system. Directors and senior executives should also be certified fit and proper by the Commerce Commission.

BNPL was designed in a way that was not currently subject to the consumer protections in the Credit Agreements and Consumer Finance Act 2003. The new regulations would be drafted with the aim of treating BNPL as a consumer credit agreement under the CCCFA.

Consultation on the details of the proposal, such as the threshold and what would happen for senior loans, would begin later this year. It was expected that the final regulations would be established in 2023.

Ruth Smithers, managing director of financial mentoring service provider FinCap, said the regulations were a “huge step forward” to address BNPL lenders who took a quarter of their income from late fees and sent whānau to unfair debt collection, Smithers said.

“It’s great to see measures that should weed out the most egregious behaviors of lenders in this rapidly growing market,” she said.

She considered the $600 threshold to be too high.

“We will continue to work closely with financial mentors to understand the impact of the changes, and we will continue to call on the government to close any loopholes.”

In July, the owner of Auckland liquor store Panmure Bottle O’ was criticized for his decision to allow people to use provider BNPL Afterpay to buy alcohol.

Hours after the Herald reported on the move, the store said it would no longer accept this form of deferred payment for alcohol.

Store management said they are “reviewing our policies” and that “therefore, until further notice, Afterpay will not be accepted as a method of payment in our store with immediate effect.”

Te Arawa iwi justice representative Billy Macfarlane told the Rotorua Daily Post last year that increasing accessibility to alcohol could, in his view, lead to more drugs, gambling money and abuse.

He said money governed how much alcohol you could drink.

“If you went to the bottle store and only had $30 on you, you can only buy $30 worth of booze. If you have a buy now, pay later program, you can just buy more booze and you can end up worse off.

Members of the business and health sectors are concerned about the prospect of BNPL systems being used to sell alcohol.  Photo/NZME
Members of the business and health sectors are concerned about the prospect of BNPL systems being used to sell alcohol. Photo/NZME

Salvation Army social services manager Lynette Hudson, also speaking to the Rotorua Daily Post, was concerned that BNPL programs were becoming widespread in the alcohol industry which could increase domestic violence, drunk driving, health consequences, broken relationships, debt and gambling.

While members of the business community recognized its value, some were concerned about the breadth of application of BNPL programs.

Bay Financial Mentors director Shirley McCombe told the Bay of Plenty Times in August that she was concerned about using the services to buy alcohol, especially for those living with an addiction.

She said the industry had “huge concerns” about customers racking up debt on buy-it-now and pay-later services.

Alcohol Healthwatch executive director Dr Nicki Jackson said alcohol was New Zealand’s most harmful drug, so effective safeguards needed to be put in place.

BNPL’s programs have taken alcohol accessibility to a new level, especially online, she said.

“Low upfront alcohol prices are attractive to many price-sensitive groups, including low-income drinkers and young people. ‘alcohol.