Does buy now, pay later pass GO?

By JP Pelosi ·
Buy now, pay later: Pass Go or roll of the dice?

We love it when things are made easier, don't we? It's perhaps why the mantra for buy now, pay later is that it’s for anyone who values convenience. The idea of convenience is always attractive, especially when it means the initial cost of an item in your online cart is one-quarter of the price tag.

Proponents of BNPL say that spreading your purchases in this way can be done without incurring any additional fees, too. It sounds too good to be true and for the Monopoly champs among us - those who can simultaneously budget and swallow up the row of green squares - buying now and paying later is surely very satisfying.

But for the less skilled with a dependence on, shall we say, Chance, what do you need to know?

Well, firstly BNPL has become the preferred payment option in many shops. You’ve probably seen various provider logos at the checkout of your favourites. This placement of brand names like Zip, Afterpay and Latitude seems to represent an evolutionary step in the retail experience. I think this, at least in part, is why the early adopters and Gen Z shoppers have jumped onboard - there is undoubtedly a coolness factor and currency to it all (pun intended). 

However, the Australian Securities and Investments Commissions (ASIC) probably isn’t all that concerned with what’s cool. To this end, ASIC’s recent review of the sector highlights that while buy now pay later has been embraced as easier, some consumers are also too easily missing payments.

As a result, they’re paying late fees and are struggling to meet other financial commitments. The real point of contention around this, says ASIC, is that BNPL people have designed the offering as cost-free or low-cost, but perhaps haven't considered all outcomes. In short, some consumers aren’t up to the task of paying by instalment and don't fully weigh up their future financial position. So given the propensity for some to miss payments, this is becoming trickier to navigate. 

Still, BNPL continues to grow in popularity and so we need to think about its place in the landscape of financial products. Is it practical? What’s its future?

Give the people what they want: Easier payments

Whatever conclusions you draw on these questions might be dwarfed by the scale of BNPL’s growth. As at June 2019, the six buy now pay later providers in ASIC’s recent review had approved six million accounts, while the number of active accounts grew by 38%, from 2.7 million in the 2017–18 financial year to 3.7 million in 2018–19. That’s a massive uptake and interestingly coincides with a plateauing of personal credit card transactions.

But whether you’re using debit or credit for BNPL doesn’t really matter if you’re not monitoring your outgoings. Alarmingly, 21% of buy now pay later users have missed a payment in the last 12 months, says ASIC. And 47% of these consumers - the great majority - were aged between 18 to 29.

There were many other telling stats reported by ASIC, though one that stood out to me is that 55% of these consumers had used at least two different buy now pay later arrangements in the last six months. Perhaps herein lies the main issue: it’s not the product that’s tripping people up but people themselves overextending themselves … or simply forgetting about paying off their new Lacoste sneakers, as well as those new Bose headphones, oh, and that stack of books from Amazon. 

It's easy to make light of this but when it creates unnecessary stress we need to take note. Our Mozo report on the topic earlier this year found that about 70% of BNPL users said they were feeling ‘financially stressed’ about purchases made.

At the end of the day, no financial product is foolproof - we all have to be aware of how we spend and know how to budget in order to make repayments. It’s well and good to blame providers of any type for our own ignorance or lack of care, but ultimately we need to have some accountability. As I’ve suggested, BNPL is a product that probably suits an organised and financially savvy person, not someone who is rash with money, unaware of their savings position or forgetful about repayments. I’m fairly sure you could say that about home loans, credit cards or car loans, too. 

So, if you’re not great with managing your payments, maybe go back to lay-by - remember that? You pop down a small deposit on an item, say a new pair of sunnies, the shop bags it and sticks it in the backroom, and you can make small repayments over 10 weeks or so. Sounds similar, right? The main distinction however is that you don't take the item home until you pay it off. This builds in an incentive to pay, which it seems some people still need.

If you do need something right now though, BNPL makes sense. Consider a large and pricey item, like a fridge: it's going to be a great deal easier to pay off four instalments of $400 than $1,600, right? And in this instance, the financially well-versed might even see the benefit of not paying interest through a BNPL service.

It's really pretty amazing that we can shop this way now, quickly and without needing to meet the full price upfront. But might I suggest that if you have trouble managing the types of costs that can sneak up on you in Monopoly, you know, like landing on an already purchased Park Avenue, then maybe you need to work on your budgeting skills first.

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