Financial counsellors say the number of clients with buy now, pay later debt has exploded in the past 12 months

Financial counsellors say the number of clients with buy now, pay later debt has exploded in the past 12 months
  • An increasing number of Australians who seek financial counselling have buy now, pay later debt.
  • A new report from Financial Counselling Australia says many users are “overcommitted” to BNPL products.
  • The report calls for harsher government regulation, which major industry players have consistently rejected.
  • Visit Business Insider Australia’s homepage for more stories.

The number of Australians approaching financial counsellors with buy now, pay later debt has exploded over the past year, a new report says, as advocates call for tighter regulation and legislative oversight to protect vulnerable users.

On Monday, Financial Counselling Australia (FCA) revealed that 84% of counsellors captured in a September survey said half or more of their clients had BNPL debt. That figure was just 31% a year prior, FCA said.

Some 61% of respondents said clients with BNPL debt are struggling to pay for other living expenses, including food, bills, and rent.

The survey also revealed that many hard-hit Australians are prioritising their BNPL repayments over other necessities in order to keep the service active.

Those findings mirror a 2020 report by the Australian Securities and Investments Commission, which found around one in five BNPL users chose to repay their BNPL balances before directly purchasing essentials like food.

But that does not mean users are loading their BNPL accounts with discretionary purchases to the detriment of their daily needs.

FCA said a considerable portion of users have now become reliant on BNPL services to pay for their everyday essentials.

Some users stuck in the cycle have now become “overcommitted” to the sector, opening accounts with multiple competing services to keep food on the table.

The organisation said the way BNPL services are structured and the fact they can negatively impact a user’s credit score means they should be regulated like traditional credit products under the National Credit Code.

Because they charge fees, not interest, BNPL providers currently are not currently subject to that legislation.

Instead, major BNPL, including Afterpay, Zip, and Humm, self-regulate under a code established and enforced by the financial industry itself.

This means BNPL services are not required to undertake the same credit checks that banks and other traditional lenders do, a move which critics say can expose vulnerable users to debts they otherwise would not be allowed to take on.

Many users are not even aware that BNPL repayments qualify as a form of debt, the report found.

“We are therefore calling on the Australian Government to commission an independent review of the existing legal
framework, with a view to developing a fit-for-purpose regulatory response, that will make BNPL safer for all users,” the FCA said.

“Undertaking that review should be a priority.”

A parliamentary joint committee on mobile payment and digital wallet financial services has already called for an official inquiry into the sector and its self-imposed code of practice in order to “investigate issues related to consumer protections”.

But the industry has long defended itself as a safer alternative to credit cards, which can expose users to tens of thousands of dollars worth of debt, opposed to the smaller individual limits set by most BNPL providers.

The sector has also rallied behind in-house credit checking systems. In 2020, Afterpay co-founder and co-CEO Anthony Eisen said traditional credit checks “often provide an incomplete picture of a customer”.

The report also fired shots at the emerging tide of pay-on-demand services, which offer wage advances through similar interfaces.

“Wage advance products are becoming more prevalent and are causing harm for some people,” the FCA said.

“Although distinct from BNPL, they use the same gap in the law to offer products without safe lending practices.”