The Commonwealth Bank told a parliamentary inquiry this week that its data shows customers who use buy now, pay later (BNPL) services are more likely to overdraw their accounts and fall behind on repayments.
The analysis, provided to the federal Parliament’s ongoing banking inquiry, says 7.2% of customers who used BNPL loans in 2020-21 overdrew their accounts, compared with 3.9% of the banks’s non-BNPL customers in a similar age bracket.
CBA said 4.8% of its customers who used BNPL operators had fallen behind on repayments, compared with 2.8% of non-BNPL clients.
In addition, it said customers who used BNPL products had a 6.4% chance of entering financial hardship, compared with 4.9% for customers in a similar age bracket who did not use BNPL products.
It follows debate around whether BNPL companies like Afterpay and Zip should be forced to conduct credit checks on customers as banks do. The Commonwealth Bank’s own, newly-launched BNPL product StepPay conducts credit cecks.
In late October, CBA announced it was launching a fleet of “smart” point-of-sale terminals that would operate in direct competition with BNPL products.
“We are challenging the challengers head on,” CBA’s head of business banking, Mike Vacy-Lyle, said of the move.
“We have a significant share of devices in the field and of business customers, and we think with our reach and scale, we can take them on head on and beat them at their own game.”
The bank’s data supporting its claim that customers with BNPL loans are at higher risk of over-extending themselves, was disputed by the BNPL sector, who responded by pointing to low levels of delinquency and defending the checks that operators conduct on their customers.
But the code of conduct of the BNPL sector debuted in February has faced its own criticism. “It’s not worth the paper it’s written on,” payments consultant Brad Kelly told Business Insider Australia.
“For starters, it’s voluntary. Secondly, it carves out any amounts under $2,000. So that’s half … exempt. There are no repercussions for any breach. And it doesn’t mandate anything around credit checks or binding vital law. It’s useless.”
Angus Sullivan, CBA’s group executive in charge of retail banking, said the organisation believed BNPL was a product that could “provide benefits to consumers,” but that there were a number of BNPL providers “not undertaking the appropriate checks which can result in customers having access to credit where they potentially shouldn’t.”
“As shown in our analysis, the lack of credit checks by some BNPL providers have resulted in a higher proportion of customers who find themselves in arrears and financial hardship, which is why we undertake both internal and external credit checks for our customers applying for StepPay.”
The figures were provided by CBA after chief executive Matt Comyn took a question on notice from Labor MP Andrew Leigh at the latest round of bank inquiry hearings.
‘Kryptonite’ for buy now pay later
Kelly previously told Business Insider Australia that, facing a packed field of new entrants, little prospect of profitability, and now the threat of regulation, smaller BNPL players were unlikely to make it. Now he thinks the entire sector is under threat if government regulation comes into effect.
With Afterpay acquired by Square as part of its self-contained “walled garden” platform servicing both merchants and consumers, Kelly said others in the space operating at a loss would be wiped out entirely by regulation.
Grant Halverson, managing director of financial services consultancy McLean and Roche, recently published analysis finding Australian BNPL stocks were down an average of 79% in 2021.
The regulatory hole left the big banks increasingly eager to put weight behind filing it as the number of players operating in Australia expanded.
“Consumer credit laws in Australia are some of the strictest in the world” for banks, Kelly said.
Aside from the potential risks BNPL products present for its core user base of young women, CBA and others were increasingly focused on the danger upstream for banks when customers using these platforms sought to also use banking products.
“It brings an element of risk into the financial system,” Kelly said, “in that you have a lot of customers who have got thousands of dollars in credit out the door.”
“And because the buy now pay later players don’t do credit checks and don’t report to credit agencies, those customers appear at a bank for a mortgage or a personal loan, and the bank has absolutely no line of sight whatsoever.”
Kelly gave the example of a potential BNPL user who had “$2,000 bucks [out] to Afterpay, $5,000 to Openpay, $5,000 to Humm” without credit checks conducted for any.
“The only way a bank will know how much you’ve got is what you tell them. So banks have to have doomsday scenarios with anyone who’s got a buy now pay later because of this.”
“It’s got an upstream effect.”
Kelly said the final outcome of the inquiry would be regulation “of some kind” that could be “kryptonite” for the sector.
“Their bad debts are enormous. So these businesses are running massive, bad debt books. And they’re not checking their customers properly for their ability to repay.”
Westpac told the inquiry some customers managed their BNPL loans sensibly, but others who needed hardship assistance were resorting to BNPL loans from multiple providers to cover their day-to-day expenses, including buying groceries, clothing and medical services.
Diane Tate, chief executive of the Australian Finance Industry Association, who represents BNPL firms, said sector data showed less than 1% of providers’ customers needed hardship assistance, even in the peak of the pandemic.
BNPL giant Afterpay said its data showed 96% of its customers’ instalments were paid on time, and added that the average order size was only $150.
Zip Co, the second-largest Australian BNPL provider, said the company received about 500 hardship requests a month, compared with its 2.6 million Australian customers.
Labor MP Andrew Leigh said the responses from both CBA and Westpac should be carefully scrutinised by regulators.
“The data certainly shows that it’s important to look at the downstream effects of buy now, pay later,” Leigh said.