Banking

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Paul Modra Executive Manager Member Value and Distribution Police Credit Union

BANKING Buy now, pay later – through the nose

Buy-now-pay-later (BNPL) options are at the fingertips of most Australian shoppers. They provide the perfect instant gratification of buying something now with the “convenience” of paying it off later.

But there are some serious potential pitfalls to consider, with the Australian Securities and Investments Commission (ASIC) finding that 20 per cent of BNPL users go without everyday living essentials to meet repayments and another 15 per cent have been forced to take out additional loans to make ends meet.

A staggering $9bn of BNPL payments were processed in Australia during the 2019-20 financial year, with one in every five Australians regularly using these services. A growing number of merchants now offer BNPL as a payment option to increase their online and in-store transactions.

How does BNPL work?

A BNPL service lets you buy goods up to limits of around $2,000 by paying part of the purchase price at the time and the rest in instalments from a linked debit or credit card. Get what you want right now, and the merchant gets paid upfront by the BNPL provider.

If you manage to pay your instalments on time, there is normally no interest or fees to worry about.

Merchants are charged a service fee for BNPL payments and, while they receive the full amount of the purchase price upfront minus the associated fee, BNPL running costs are significantly higher than other payment options such as credit cards and PayPal.

Most BNPL providers impose nosurcharge rules that prevent the cost of fees being passed to the consumer, but there are calls to change this in the future and that might increase the cost of goods to the consumer in the future.

What are the downfalls of BNPL?

Difficulty in tracking your spending.

According to ASIC, more than half of BNPL users are spending more than they otherwise would, with one in six with overdrawn accounts, delayed bill payments, or borrowed money because of overcommitment through BNPL platforms.

Be careful of the effect of BNPL on your credit score and late payments.

While older Australians had largely shunned the BNPL boom, they’re now one of the growing groups of consumers. Younger people and low-income earners are very familiar with BNPL schemes, using it to shop online, and buy clothing and big household items.

This payment option has brought about a jump in the number of people struggling to pay debts and, with six out of 10 BNPL users aged under 34, there is growing concern that regular late payments could affect their future credit rating and shatter their dreams of future home ownership.

BNPL schemes are unregulated

BNPL accounts might seem easy to use but people forget they’re entering legally binding contracts that are not regulated like normal credit applications done through a financial institution such as a bank or credit union. It means people are not carefully assessed on whether they can afford the repayments, taking into account regular living expenses. This can lead to financial heartbreak when something goes wrong, like losing your job, getting your hours cut or an unexpected large bill.

It means people are not carefully assessed on whether they can afford the repayments, taking into account regular living expenses. This can lead to financial heartbreak when something goes wrong, like losing your job, getting your hours cut or an unexpected large bill.

What you should consider with BNPL

As with any spending decision, consider whether you can afford something and really need it, as you are only delaying the need to repay a purchase. If you rely on BNPL payment options, consider the type of account access card linked to your BNPL account to avoid paying extra interest on purchases. Limit yourself to only one BNPL account to track your spending.

Could a credit card work better for you?

Although BNPL options are widely available at many merchants, they cannot be used to pay bills and all daily transactions, unlike credit cards.

Credit card interest-free periods could be used as part of a cash-flow strategy combined with offset or redraw accounts. For example, depositing your salary in your offset or redraw accounts during interest-free periods means you do not use these funds for your daily spending. You can then benefit by having your money lowering (offsetting) the interest payable on your mortgage, until you require the funds for your credit card payment.