Keep credit sustainable for those of modest means

by Dr Rajat Roy

With the rising cost of living impacting people’s ability to pay for necessities including groceries, rent and energy bills, more and more Australians are turning to Buy Now, Pay Later (BNPL) schemes to cover their day-to-day expenses. 

Data from consumer group Choice in 2022 found that one in five Australians had used a BNPL service to pay for household goods. 

BNPL products have put a huge competitive pressure on credit card companies but remain popular with consumers. They have also sparked criticism for pushing vulnerable consumers into spiralling debt. 

Although, unlike credit providers, they don’t charge interest fees, BNPL products are largely unregulated, and providers have no legal obligation to ensure users have the capacity to repay the loans without hardship. Missed payments can result in hefty penalties, pushing already stretched households even further into debt. 

The federal government’s recent announcement that they will treat BNPL similarly to credit providers has been welcomed by many consumer advocacy groups. But for those who regularly use these products to keep food on the table and a roof over their family’s head, the prospect of losing access due to tougher credit checks is causing deep concern. 

Under the government’s proposal BNPL providers will need to follow responsible lending, meet hardship and statutory dispute resolution requirements, comply with product disclosure and conduct responsible marketing.   

These changes will likely help reduce the dangers for consumers who get caught up in debt due to purchasing luxury or unnecessary products, but what about the impact on those who use BNPL as a valuable tool to manage cashflow issues in the family budget and ensure their food and housing security in an increasingly challenging economic context? 

In this case, increased access to finance could support and promote human flourishing, and care is needed to ensure that can continue. 

Alternate credit channels like peer-to-peer (P2P) lending have long provided financial solutions to people with modest means. P2P lending evolved as traditional banks may have considered certain consumers ‘too small to care about’ - they’re not seen as profitable so aren’t able to access even modest credit. In the past they have been forced to resort to ‘payday lenders’ where short term loans come with significant interest payments. 

Fintech companies have leveraged advanced technologies and data analytics to design alternate forms of peer lending and provide instant credits, leading to the development of BNPL products, allowing people to pay off small chunks regularly without incurring interest. These products cater to a previously untapped, but clearly significant, demand.  

One of the key concerns raised by the lack of regulation around BNPL is the ability for people to have multiple accounts with significant balances and no checks on their ability to pay them off. These services can lead to the same consumer behaviour as credit cards – without having to face the prospect of parting with a sum of cash, they can just as easily lead to the same potential problems when they can’t be paid off on time. 

These are all good reasons to better regulate the sector, but it’s vital that it doesn’t lead to the market of people seen by credit providers as ‘too small to care about’ – smaller consumers and those of modest means – having their access restricted in the process. 

While it’s clear some regulation is needed, there needs to be a focus on ‘sustainable credit’ practices, across the full range of financial products. That means checking that people can fulfil their loan payments, and creditors offering accommodations that ensure an inability to pay is not disastrous for the consumer when they hit tough economic times. 

Financial institutions should also be required to devise better products including responsible and flexible loans to cater to those who collectively represent a significant demand but are considered ‘non profitable’ at the individual level. 

I’d also like to see the government design public service advertisements to educate people with lower access to finance about imminent dangers of increased access to finance (BNPL, credit cards) and potential future hardships.  

BNPL products are clearly servicing a need for many in the community, and ensuring they aren’t faced with further hardship should be a key consideration in developing these regulations. 

Coupled with a focus on education and the need for all credit providers to behave responsibly, BNPL has the potential to become a useful and safe tool for those in need. 

Consumer behaviour expert Dr Rajat Roy is Associate Professor of Marketing at Bond University