Reserve Bank memo warned of buy now, pay later dangers

Buy now, pay later’s boom was starting to be a risk to financial stability and exploited gaps in law, an RBA memo warned.

An RBA memo warned of buy now, pay later players taking advantage of “gaps” in consumer lending laws. Picture: Bloomberg

Fast-paced growth in buy now, pay later platforms was starting to represent a risk to financial stability and players were taking advantage of “gaps” in consumer lending laws, according to an internal Reserve Bank memo.

The memo, which was prepared in March last year but released under Freedom of Information laws on Wednesday, also warned that buy now, pay later schemes were “yet to be tested in a downturn” and were vulnerable to rising unemployment.

The comments come amid rapid growth in funders such as Afterpay, Zip Money and Latitude Pay. The major banks, including Commonwealth Bank and credit card providers, are also examining their own schemes.

Afterpay’s shares rallied this week after Goldman Sachs analysts tipped the buy now, pay later platform would deliver positive surprises in its interim profit results. They fell following the publication of the documents by The Australian, closing down 1.2 per cent at $32.80. Zip Money fell 1.7 per cent at $3.57.

The Goldman report noted that the global customer base of the buy now, pay later service could be close to 7.2 million as at December 31, based on the latest app download data.

Afterpay last month updated investors, saying it hit a record $1bn in underlying sales in November, buoyed by the Black Friday and Cyber Monday shopping frenzy.

The RBA has since said it is eyeing the impact of buy now, pay later providers but its focus was on whether there were inefficiencies around the cost of the payments system.

One key concern for the RBA is their inability for retailers recoup these high transaction costs through surcharges and the potential of that trend to seep back into the established card schemes.

But the confidential RBA memo, in a section which began with a reference to “risks to financial stability”, warned that it is “not convinced all consumers understand the risks” of the platforms. It also flagged they may eat into the margins of retailers.

The RBA did not name any of the buy now, pay later players in its memo, but noted under “poses some risks” tags that the growing risks of the schemes were borne by both merchants and indebted consumers.

The memo also noted the schemes are yet to be tested through the economic cycle and might be “vulnerable to rises in unemployment, falls in consumer spending”.

It also cautioned buy now, pay later schemes which were highly profitable “take advantage of gaps in laws about lending to consumers”.

It wasn’t all about risks.

The RBA noted consumers without credit cards could benefit from buy now, pay later.

It was a way for “consumers to access credit without paying high interest if able to pay on time,” the RBA said. “Can avoid some of the pitfalls of credit cards,” it added.