Most Buy Now, Pay Later (BNPL) companies say they don’t sell debt — but they will still sell your debt to a debt collector. And if the debt collector is not collecting debt, what’s it collecting?

Such is the twisted game of semantic linguistics the BNPL sector plays as it tries to pretend it doesn’t lend money to consumers, who get to buy stuff without paying for it right away.

What could possibly go wrong?

It is incorrect to say the market is unregulated. BNPL vendors still need to comply with Know Your Customer (KYC) and Anti-Money Laundering regulations (AML).

Nor is the position on debt inside the BNPL sector universal. Zip and Klarna promote their use of credit checks as responsible business practice, for instance. 

However, their rival (and market darling) Afterpay, famously, does not. In fact its web site brags, “Your credit score can be impacted when somebody does a credit check on you or if you are reported as paying debts late; at Afterpay, we never do credit checks or report late payments.”

And most BNPL providers adhere to the Afterpay philosophy.

Critics of the sector argue that a lack of regulation, and the ease with which consumers can sign up to multiple schemes with no oversight or control, means a new generation  of consumers is finding a new way to dig themselves into a serious financial hole.

Ironically this is happening even as some BNPL companies routinely lack the cash to cover consumer demand on their platforms, leading to failed transactions. This happens because BNPL companies typically allocate an amount of money per merchant that they are willing to cover on a daily basis, based on algorithms they apply to the merchant’s transaction history. Once the allocation for that merchant caps out, transactions will fail — a potentially embarrassing and certainly annoying experience for the consumer left standing red-faced at the point of sale.

And it happens more frequently than the industry cares to acknowledge, based on Which-50’s investigations.

This is less of an issue for a company like Afterpay, which has scale, or Klarna, which is a bank — but it’s a big and growing problem for smaller operators.

Postmodern debt

The popularity of BNPL continues to grow, particularly among Millennials and younger generations, who came of age against the background of the GFC last decade.

That made them understandably averse to the kind of institutionalised debt embodied by traditional credit cards.  So instead they chose to pursue a new form of digital-savvy and customer-tech-friendly faux debt. In contrast to high-interest credit cards, BNPL (which generally entails zero interest) appears to be an attractive option. But it’s a mirage. Once late fees and recovery fees are applied the cost of BNPL can massively exceed the cost of interest on a traditional credit card.

Take Afterpay as an example. According to the company’s terms and conditions  “Afterpay will automatically try to process payments on the scheduled dates from your card. If a payment is not processed on or before the due date, late fees will apply — initial $10 late fee, and a further $7 if the payment remains unpaid 7 days after the due date.”

On, say, a $50 initial transaction, a defaulting consumer has already racked up $17 of cost in just the first four weeks — equivalent to an annualised credit card rate of 422 per cent.

In fairness, Afterpay caps the size of the late fees, but that’s still a rate of return that would make a Mastercard risk manager blush.

In preparation for this piece we contacted more than a dozen vendors, consumer advocates and other market participants. Some like OpenPay declined to comment. Others like Brighte said they would, but never did, while Afterpay and Humm had not responded by time of publication.

Digital acceleration

Spurred on by the explosion in online commerce last year, consumers’ spending via BNPL is increasing — and so are their liabilities. According to ASIC’s report of BNPL arrangements, more than 50 per cent of users are spending more, while at the same time, one in six users have become overdrawn because of delaying repayments or borrowing additional money. 

Figures published by Afterpay indicate that the sector still only captures a relatively small share of retail spending, at around four per cent, but that figure is growing fast. Compared to January 2020, spending on BNPL has increased by 106 per cent. And much of that growth is credited to younger customers — among Millennials and Gen Z, BNPL use is up 75 per cent and 116 per cent, respectively.  

So is BNPL really a way to manage budgets and remove some of the friction from ecommerce, or is it just another way to accrue debt?

According to Steve Mickenbecker, Canstar Group Executive, Financial Services, “There is a risk that BNPL could become the debt trap for Millennials that credit cards were for Gen X, as both make it easier to spend on things you don’t need and can’t afford.”

It is this “debt trap” that consumer advocates are worried about — as the BNPL industry continues to evade regulation from the Commonwealth Credit Act. 

Though BNPL providers insist that they are not in the business of selling debt, this rides on a definitional technicality. While credit is defined to include interest repayments on an amount owed, the BNPL business model — charging fees rather than interest — escapes the regulatory framework of the Credit Act. 

Julia Davis, Policy Officer, Financial Rights Legal Centre

According to Julia Davis, Policy Officer at Financial Rights Legal Centre, “These companies might not be making the majority of their profits from late fees or interest rates, but they are absolutely encouraging consumers to spend money that they do not have. These companies make money off of a very seductive trick of marketing where products appear less expensive if you only need to pay a fraction of the cost up front.”

“Perhaps they are not ‘selling debt’ but they are certainly encouraging it,” she says.

A heck of a loophole

Interest charges are not the only risk for consumers. As BNPL providers are not regulated by the Credit Act, they are not required to do a responsible lending assessment, or a credit check, although vendors like Zip and Klarna in fact do such checks. 

“The real danger for consumers is that there is nothing to prevent them from opening accounts with many different BNPL companies at the same time and getting in big financial trouble in a very short amount of time,” says Davis.

“BNPL providers have no legal requirement to assess whether you can afford the repayments before you enter into a contract with them. Some of these services are now available for products as high as $30,000. That is an enormous financial commitment for someone, and it might not be affordable.”

ASIC’s report shows that 40 per cent of BNPL users are students or work part time. Two in five users earn under $40,000 — making them some of the lowest income earners in the country. 

“The industry must surely want to contain the escalation of debt to people who

Steve Mickenbecker, Executive Financial Services, Canstar Group

are struggling financially. It protects consumers and the industry,” says Canstar’s Mickenbecker. 

“The most common safeguard is that your BNPL provider will not allow further credit if you are already in arrears with them, capping the problem early.”

It might actually exacerbate the problem.

“But if you are signing up with a different provider, you will neatly sidestep this protection,” says Mickenbecker.


If BNPL were to be included in the Credit Act it would be a safeguard to protect consumers who are at risk of indebtedness, who are already in financial difficulty and act as a minimum approval requirement. It would also address the current loophole that allows consumers to join multiple BNPL providers.

Matthew Abbott, Director, Corporate Affairs, Zip Co

According to Matthew Abbott, Director of Corporate Affairs at Zip Co, “We have done credit checks on every single applicant since day one. As a result, only 1 in 100 Zip Pay customers is late each month compared with 1 in 6 for credit cards. That means Zip makes less than one per cent of its revenue from late fees. Our model is not based on customers falling behind.”

A spokesperson from Klarna told Which-50, “We have a sophisticated decisioning engine and we credit check each of our customers when they make their first transaction. Klarna’s credit check does not impact an individual’s credit score, however the fact we have checked is visible on the file. We believe all providers should complete credit checks as it would lead to better outcomes for consumers.”

Both Zip Co and Klarna have signed up to the Australian Finance Industry Association’s (AFIA) voluntary Code of Practice, which came into effect on the first of March this year. According to AFIA, the Code — to which the eight largest BNPL providers are signatories — the membership represents an estimated 95 per cent of the Australian BNPL market.

According to a Klarna spokesperson, the company has signed up to the Code “because we believe it is important we continue to play a role in driving the highest standards for consumers”.

Zip Co’s Abbott says the company is “supportive of the Code and believe it’s a good first step.” 

A number of consumer groups, however, have been critical of the Code, stating in a combined release from Financial Rights Legal Centre, Financial Counselling Australia, Consumer Action Law Centre and CHOICE that the Code is “not a substitute for adequate regulation by government under Australia’s credit laws”. 

“BNPL is credit and should be regulated like other credit products,” they argued.

Canstar’s Mickenbecker says of the Code, “Its shortcoming is that it doesn’t give definitive standards, allowing providers to choose from a menu of options, rather than prescribing a clear minimum standard. The gap in consumer protection means some BNPL customers may slide through the cracks.”

No debts, except the ones they collect

For an industry that largely avoids regulation based on the legal definitions of credit and debt, it’s interesting to note that BNPLs can still on-sell debt to debt collectors when customers are unable to pay back their loans. Some providers outsource to collections agencies and others don’t.

Zip Co, for instance, says it does not sell outstanding receivables to third parties and nor will it take legal action against non-payers. 

According to Abbott, “Because we do credit checks up front, we have very low arrears and bad debts. But for those we have, we chase the debt internally and then when they become delinquent, we write off the debt.”

“This is because the amounts of money are relatively small — in the hundreds of dollars.”

Klarna, on the other hand, does refer customers to debt collectors “as an absolute last resort”. 

According to a Klarna spokesperson, “We never refer hardship cases to debt collection and if an agency becomes aware the customer is in financial hardship, those cases are passed back to us to manage. Klarna has also made a conscious decision not to list defaults on customers who are in arrears and, unlike some other credit providers, we do not initiate bankruptcy proceedings.”

Limepay, which offers a “white-label” service to merchants, essentially allowing

Dan Peters, Chief Revenue Officer, Limepay

them to provide BNPL services under their own brands, is not a signatory to the Code. Dan Peters, Limepay’s Co-founder and Chief Revenue Officer, told Which-50 that the company wasn’t consulted during development of the Code, but feels it “aligns with the principles” underlying it. 

He says that because unlike credit cards, BNPL arrangements are on a per-transaction basis, “if the customer doesn’t pay back the individual debt, they cannot continue to transact,” and that therefore, “there is no opportunity to get into the debt spiral that can be seen with credit card debt.” 

Late fees are capped at $20 per transaction.

But Peters’ view ignores the preponderance of BNPL alternatives. Consumers can continue to spiral simply by jumping to a new BNPL provider, just as easily as tapping on the screen of their phone.

Limepay does, however, take efforts to keep customers aware that they’ve got payments due — sending more than eight communications via SMS and email related to each purchase. This makes them “highly unlikely to file and forget about the purchase,” according to Peters.

Incumbents not sitting still

As you might expect, the traditional lenders aren’t exactly taking this encroachment on their turf passively, although responses vary.

Shayne Elliott, CEO, ANZ

In an interview with the Nine newspapers last month, ANZ bank CEO Shayne Elliott expressed skepticism about the sector — in particular, the legalistic footwork that allows BNPL vendors to escape definition as lenders.

“Apparently when you buy something and pay for it later, that’s not borrowing,” he’s quoted as saying. “I think most thinking people would struggle with that definition.”

While he acknowledged that there is a place for BNPL, he thinks the extent to which it will take business from credit cards and other forms of finance is “wildly exaggerated”.

Other members of the Big Four are not quite so dismissive. Westpac, for example, was an early investor in Zip Co. It offloaded its shares in Zip late last year, around the same time as it announced that Afterpay had joined as a partner on its Banking as a Service (BaaS) platform. While that partnership appears to presage a wider range of financial service offerings from Afterpay rather than a BNPL play from Westpac, it leaves the door open for bank-backed BNPL offerings in future.

A desire among consumers for BNPL backed by a known entity like a bank was cited by NAB for its recently announced StraightUp card, a BNPL offering that looks to all the world like a credit card. The difference is that it can only be used for purchases up to $3000, and no interest or late fees are charged (there is a monthly account maintenance fee). And of course the difference with other BNPL offerings is that NAB does the same sort of credit checks for StraightUp as it does for any credit card.

Also unlike other BNPL services, it acts like a line of credit — users can continue to use it even if they’ve made purchases they haven’t paid off.

Finally the Commonwealth Bank has had a bit of an each-way bet on its approach to BNPL. It has backed Klarna just as Westpac partnered early with Zip. But it’s also announced its own card much like NAB’s. No interest, and just a monthly account maintenance fee (which, like the NAB model, isn’t charged in a month when there’s no balance owing).

The risk, obviously, is that users will overstretch themselves and pay the monthly fees, rather than paying off the principal of the debt. That could end up being a great deal more expensive than old-fashioned interest rates.

Local fintech player Beforepay is unimpressed with the banks’ moves into the sector. CEO Tarek Ayoub told Which-50 “the banks are trying to force retention

Tarek Ayoub, Co-founder and CEO, Beforepay

of the status quo. They’re trying to muscle their way back to business as usual, where at the end of the day the bank still wins at the expense of everyone else.”

He believes that banks aren’t operating in a customer-centric innovative way, merely reacting to competitive pressure. “The banks’ move into the BNPL territory and alternative fintech sectors only further legitimises the sectors, and unfortunately they need to do more than reactively rolling out new solutions to win trust and regain loyalty from consumers.”

Occupying the mid-ground between traditional banks and nimble fintech upstarts is PayPal, which has been around long enough now to count as an incumbent. It, too, has seen the BNPL writing on the wall and quietly launched its “PayPal in 4” service recently. Customers simply see the option at checkout to pay for their purchases all at once or in four payments.

Andrew Toon, General Manager Payments, Paypal

PayPal’s BNPL spokesperson Andrew Toon said the company introduced the service in response to interest from customers and merchants. Unlike the other BNPL vendors, PayPal has a leg-up in terms of the volume of historical transaction data it has on customers, as well as its relationships with merchants worldwide.

As for regulation, Toon indicated that PayPal regards it as “a matter for policymakers”.

“PayPal’s business around the world is governed by constantly changing policies, laws and regulations,” he said.

“In order to serve our customers in over 200 markets, we have an ongoing dialogue with regulatory bodies and work closely with them to comply with relevant regulations.

“We take our regulatory obligations very seriously and are committed to complying with the laws and regulations in Australia if, and as, they evolve.”

Main image credit: Photo by Ehud Neuhaus on Unsplash

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