Government ponders regulating 'buy now, pay later' lenders

With this Christmas about to set a new "buy now, pay later" record, the Government is considering regulating the fastest-growing form of debt in the country.

Shoppers have embraced buy now, pay later loan accounts, which allow them to buy things they cannot pay for out of their own savings, with nearly 600,000​ people having one or more accounts.

But agencies which help families struggling under problem debts have called out buy now, pay later lenders, which are not covered by responsible lending laws.

They say overdue buy now, pay later loans increasingly feature in the problem debts of some the country's most vulnerable families.

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But buy now, pay later is popular among shoppers, especially those under 45​ years old, the Ministry of Business, Innovation and Employment (MBIE) said in a discussion paper.

About 75 ​per cent of customers report extremely high satisfaction with buy now, pay later, which are consumer loans paid back in a small number of instalments, though a minority of people struggle to make repayments on time.

Data covering 35 to 40​ per cent of the buy now, pay later market showed that in August, 8.3​ per cent of active customers had late or missed payments, compared to 7.9​ per cent of personal loans and 4.2 ​per cent of credit cards, MBIE said.

MBIE identified seven lenders: Afterpay, Humm, Zip, Laybuy, Genoapay (Latitude), Openpay and Klarna.

Keith McLaughlin​, managing director of Centrix​, which tracks people’s credit worthiness, said on current trends Christmas would be the largest ever in terms of buy now, pay later transactions.

That was in part because the loans were often used by online shoppers, and Covid-19 trading restrictions had encouraged many people to switch their shopping online.

There were three options for regulating the industry, MBIE said.

The first was to leave buy now, pay later outside the responsible lending laws covering other lenders, allowing the industry to develop its own voluntary code of standards, including how it handles customers who fell into financial hardship.

The second was to require a code of conduct to be developed, which MBIE would approve, and monitor.

The third would be to bring buy now, pay later under the same lending laws covering other lenders like banks, finance companies and credit card companies.

Gary Rohloff​, Laybuy managing director, said given the growth of the sector it was “appropriate to look at options to better protect vulnerable consumers”.

Regulation should at least require credit checks and reporting, credit limits and financial hardship policies that committed lenders to work with customers who were in financial difficulty, Rohloff said.

Bringing buy now, pay later lenders under responsible lending laws could be phased in as the sector matured, MBIE said.

As “open banking” technology developed to make it easier for buy now, pay later lenders to rapidly check whether applicants could afford loans the ministry said.

In theory, it could be possible for buy now, pay later providers to conduct real-time affordability assessments, if they had access to borrowers income and expenses information, MBIE said.

“In other countries this type of approach has been suggested as a way to ensure that each transaction is affordable to the consumer”, it said, while recognising that open banking was in its infancy here.

Tim Poskitt​, country manager of open banking tech company Yodlee​, said technology could already facilitate fast affordability testing.

“It’s vital that in the face of its explosive growth we keep our eyes on the importance of lending responsibly,” he said.

Submissions on the discussion paper close on December 16.