A global alliance of consumer groups is calling for regulation of the buy-now, pay-later (BNPL) industry amid warnings more of its customers will end up in a debt spiral as the cost of living goes up.
Consumers International, an organisation that represents consumer groups in 10 countries including Australia, New Zealand, the US, Korea and Denmark, is calling for urgent action.
Choice, Financial Counselling Australia and Consumers' Federation Australia are among alliance members that have released a 'global statement' with six key requirements for effective regulation of BNPL.
"This is united call for governments and regulators to just regulate buy now pay later, like every other form of loan," Choice CEO Alan Kirkland said.
BNPL has exploded in popularity as millennials shun credit cards in favour of the products.
Globally, the BNPL industry is estimated to be worth around $US157 billion, according to the Global Payments Report.
In Australia, the BNPL market was worth around $14.2 billion in the financial year ending 2021, according to UBS.
In the US, BNPL is worth around $US17 billion, and in the UK it is around $US4 billion.
"The reality is that people are borrowing up to $30,000 for things like solar panel and cosmetic surgery with no proper protections," Mr Kirkland said.
BNPL is also increasingly being used to pay for essential items like groceries, utilities and child care.
BNPL products allow customers to receive goods and services up front, while paying for them over time. The BNPL companies usually cover the cost of the purchase and require the customer to repay the amount in installments.
The BNPL companies typically make money from charging businesses a fee to provide the service, or through late fines when customers miss a payment.
Because of a legal loophole BNPL is not regulated under the National Credit Act, because they do not charge interest on repayments. Instead BNPL follows an industry code of conduct.
Australia has led the BNPL boom. Fintechs like Afterpay and Zip Co are the two biggest players locally with 6 million 'active' customers in December 2020, according to the Reserve Bank of Australia. Smaller players include OpenPay, Humm, Klarna and Latitude.
'Big four' banks like CBA as well as PayPal and Mastercard are also trying to get in on the action.
In December Barclays announced it was partnering with Amazon to launch a new BNPL product for online shoppers in the UK, after launching a similar product in Germany.
Governments are now playing catch-up on how to regulate the industry.
'Unregulated industry'
Lien Duong, senior lecturer at Curtin University's school of accounting, economics and finance, said BNPL was an unregulated industry.
"The UK is looking at regulating BNPL under the Financial Conduct Authority, but is unclear what the laws would look like," she said.
"In the US, the federal level is not acting, but the state of California, is actually leading the way and last year it classified BNPL as a loan."
In Australia, the federal government has announced it would introduce regulations for BNPL and other payment systems by the middle of 2022. However, there is an election due before then.
"There seems to be a view in Australia that buy now pay later is an innovation and therefore it's inherently good and shouldn't be touched. But that just doesn't make sense," Mr Kirkland said.
'Clock is ticking'
Thirty per cent of Australians have used BNPL services in the past 12 months, according to data from Choice.
One in five, or 21 per cent, have used it for essential items like food and utilities.
Fifteen per cent have missed or been late on a payment, and 78 per cent of those people have experienced financial hardship as a result, including taking out an additional loan or forgoing essential items.
Consumer groups warn that with wages not keeping up with inflation more Australians will turn to BNPL products to pay for essential items.
"What we're already seeing is that it's turning into a downward debt spiral," Mr Kirkland said.
"So people are ending up with multiple buy now pay later debts, they then miss a payment, they then have to pay late fees, they then have to take out another loan to may some of those costs, and skipping essentials."
Financial Counselling Australia policy lead, James Hunt, said financial counsellors are seeing the harm caused by BNPL.
The ABC has contacted the BNPL industry body, AFIA, for comment.
