Research by consumer credit marketplace ClearScore reveals that missed repayments on Buy Now, Pay Later (BNPL) services have increased by 83 per cent in the past eight months.
ClearScore’s survey follows ASIC’s investigation in late 2020 into the BNPL sector, revealing that the total amount of credit had doubled in a year, with one in five users missing repayments. ClearScore claims that this number has now jumped to one in three.
According to Stephen Smyth, Australian Managing Director of ClearScore, the BNPL industry is “flying blind”.
BNPL providers are still not subject to the regulations of the Commonwealth Credit Act, leaving consumers vulnerable to racking up debt and damaging their credit scores and future lending capacity.
Which-50 interrogated the issue of the BNPL regulatory framework in a Cover Story in late April.
“Sooner or later a cohort of consumers will fail to keep up with snowballing repayments that attract steep late fees relative to the amount borrowed,” says Smyth.
“When those debts are sold on to collection agencies, they will show up as multiple defaults, even if the dollar amount defaulted is comparatively small. This is a consumer credit access horror show in the making.”
The loophole in the Credit Act that prevents BNPL from being included is because the definition of credit relies on interest repayments. Outrageously steep missed repayment fees are, according to the regulators, not considered credit — despite the fact that BNPL providers will sell this debt onto debt collectors.
While the BNPL industry continues to evade regulation, consumers are at risk of falling into a spiral of indebtedness, especially as there are no clear regulations against opening multiple BNPL accounts with different providers.
“The real issue is that regulators have over-regulated responsible lending and reduced competition in credit for lower income customers. This removes affordable credit options, so the only option for many consumers is to take out multiple BNPL accounts, without adequately checking affordability,” says Smyth.
“This is building up to be a trainwreck for vulnerable customers and the question for regulators is whether they will prevent substantial consumer detriment — or are they just going to intervene after the real harm is done?”