Within many of our lifetimes, the options we possess when it comes to managing our financial affairs have exponentially grown. We’ve gone from the simplicity of having a savings account and a chequebook, to having a wide array of credit card services, debit options, online services, and even cryptocurrencies. A consumer seeking additional flexibility or security has relatively recently been given the option of choosing a buy now pay later (BNPL) service.
Buy now pay later is a form of credit where the consumer is effectively borrowing the price of the item they’re purchasing for the length of a given ‘delay’ period. Using buy now pay later in a deliberate and measured way, as well as making repayments on time, means there shouldn’t be a negative impact on the consumer’s credit score.
Sadly, there are enough people not reading the fine print, rendering many customers in dire financial consequences as a result.
BNPL services are inherently lower risk to consumers than traditional credit cards or bank overdrafts, given the former’s interest-bearing qualities, and the latter’s transparency. For a set amount tied to specific purchase, BNPLs – at their best – offer a structured repayment schedule that consumers enjoy in increasingly rising numbers.
As these services have grown in popularity, more service offerings have become available, each possessing their own variation on what their payment schedules are, late payment fees, and eligibility requirements. Disappointingly, there’s yet to be a formalised industry-wide practice when it comes to offering support for vulnerable consumers, or protections if something goes awry.
Some questionable examples
UK BNPL providers Klarna and Clearpay claim that borrowing money to pay for items with them doesn’t impact the consumer’s credit score, with Klarna saying even if any unpaid debt goes to a debt collection agency, it won’t be reported on the consumer’s credit file.
Thousands of UK BNPL customers have been the recipients of warnings about late payments affecting their scores from online retailers, who continue to warn about missing payments on a platform like Klarna and the negative consequences on the customer’s credit score. 28% of Australian BNPL users have found themselves in financial troubles having ‘overspent’, with many not aware of how missing payments could harm their credit score, illustrating just how potentially fraught they can be.
Thankfully, the UK examples aren’t representative of how the industry is run by-and-large in Australia. It’s something for which Australian BNPL customers should be grateful.
The solution is one of simple choice
Consumers should be able to choose. Either through allowing the BNPL provider to engage with a credit score/report provider and receive a substantiated higher deal, or disallow this engagement and receive smaller BNPL deals.
Consumer education is a process that should be undertaken in parallel. As with all, if not most regulated financial products, key notions including cost, interest rates, fees and repayment schedules need to be as unambiguous and clear to consumers as possible.
They need to be generally familiar with the fine print, so as to be aware of any ways they may be overestimating their abilities to meet the payment schedule, their obligations, or their rights.
For over 20 years Global Financial Technology Expert Chen Lahav has been leading technology and professionals in the FinTech domain while developing his speciality – global FinTech innovation. Currently, Chen consults early-stage start-ups and ASX listed companies on technical implementation, innovation and leadership in FinTech, adjacent and complementary domains.
Chen Lahav is the founder and namesake of Chen Lahav Consulting
