Warning on risks as buy now, pay later surges

The influential Bank for International Settlements has warned that rapid global growth in buy now, pay later (BNPL) services could create risks in the financial system due to a potential build-up of loans that are more likely to go bad than credit cards or personal loans.

As regulation looms for Australia’s BNPL sector, a new report from the Switzerland-based Bank for International Settlements (BIS) said BNPL had surged globally, and Australia and Sweden had the highest usage rates relative to their population.

Buy now, pay later services could pose risks to the financial system, but Australia is leading the way on regulation, the BIS said.Credit: Louie Douvis

The study credited Australia with leading the way in BNPL regulation, after the government earlier this year unveiled its plan to subject the sector to responsible lending obligations.

But the BIS raised concerns about global risks, saying data on BNPL around the world suggested users were generally younger and tech savvy, but often less financially literate than older generations. This raised the risk that some BNPL users engaging in “imprudent” spending on the platforms, and some customers taking on too much BNPL debt.

BNPL services such as Afterpay and Zip allow customers to borrow money via digital instalment loans, but because no interest is charged, the sector has escaped the regulation that applies to credit cards.

The sector has experienced strong growth around the world, with the BIS report estimating BNPL transactions hae increased by more than sixfold since 2019, to more than US$300 billion ($456 billion) in 2023.

‘The rapid ascent of BNPL could be of concern to public authorities for two reasons: consumer protection issues and the accumulation of credit risk.’

BIS report

The BIS report said even though BNPL payment costs for merchants were consistently higher than those for credit cards or online banking, merchants used BNPL to broaden their customer base, including accessing “customers who lack immediate financial means.”

It said global data suggested BNPL customers were generally riskier borrowers, and the industry warranted close attention.

“The rapid ascent of BNPL could be of concern to public authorities for two reasons: consumer protection issues and the accumulation of credit risk,” the report said.

“Since BNPL platforms suffer from high delinquency rates, a sustained growth of these platforms would warrant monitoring of their direct and indirect links with the rest of the financial system.”

The report also acknowledged Australia’s industry code for BNPL firms, which was welcomed by the chief executive of the Australian Finance Industry Association, Diane Tate, who represents the local BNPL sector.

“With our BNPL code being looked at by regulators globally as best practice, this is a good thing for consumers universally,” Tate said.

“Customers in Australia have a choice – they can use direct debit, BNPL, or credit. They can use whatever meets their payment needs. More than 6.3 million Australians now use BNPL products because it helps them budget, they don’t get charged interest and it is an easy-to-use digital technology.

“In an environment where cost-of-living pressures are increasing on many consumers, it is important they have access to the right product that meets their needs.”

BNPL transactions in Australia were worth about $19 billion last financial year, equal to about 2 per cent of Australian card purchases, the Reserve Bank has said.

Financial Services Minister Stephen Jones vowed to regulate the BNPL sector earlier this year, but in late November he said the government’s plan to introduce draft legislation this year had been pushed into early 2024.

The BIS, a global group of central banks that seeks to promote financial stability, also noted big BNPL players including Afterpay, Sweden’s Klarna, and US fintech Affirm faced “profitability challenges”.

The BIS said operating costs for marketing, administration and technology had hampered profitability, while also acknowledging the effect of stiff competition and rising bad debts in 2021-22.

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