Buy Now Pay Later or More?
Tags: Debt, Wealth, Saving, Consumption

With the arrival of Black Friday, are you ready to participate in the mad shopping frenzy? It’s time to swipe your cards. Australians love their credit cards, and it seems we’ve fallen head over heels for “buy now pay later” options like ZipPay and Afterpay. Buying something with no upfront payment required and no interest rates charged seems to be quite fascinating. But there are a few red flags that have highlighted potential issues with the delayed payment industry now. What is the actual impact of “buy now pay later” arrangements on consumers? Is it a good idea for us to buy now and pay later? Yes, it may be a good idea, but we should also be concerned about the costs.

Missed payment fees

Although many of the “buy now pay later” providers appear to be interest-free, “hidden costs”, such as late payment penalties, can also act as the interest on the loan. According to the customer research conducted by the ASIC, one in five “buy now pay later” users missed a payment in the last year. ASIC has also flagged that from 2016 to 2019, the percentage of “buy now pay later” transactions that incurred missed payment fees fluctuated between 9% and 15% each month. Although the percentage of transactions incurring missed payment fees is relatively stable, the growth of the user base in “buy now pay later” arrangements means the number of missed payment fees incurred continues to grow. In the 2018–19 financial year, missed payment fee revenue for all buy now pay later providers in our review totalled over $43 million, a growth of 38% compared to the previous financial year.

Overcommitment

Another real problem is that the “buy now pay later” arrangements give consumers an illusion that it is easier to spend money with options like ZipPay and Afterpay. To some extent, “buy now pay later” arrangements have induced users to increase their debts, even to the point where users cannot repay them. ASIC has flagged that with the help of the “buy now pay later” model, more than half of users are now spending more than they were previously spending.

Other negative consequences

Beyond missed or late payment fees or account-keeping fees as a result of “buy now pay later” arrangements, there are some other “buy now pay later” users experiencing negative consequences. Among these, excessive consumption and future wealth overdraw are main problems. ASIC has pointed that nearly half of users aged between 18 to 29 cut back on essential items to make repayments, and 15% of consumers had to take out an additional loan to make their “buy now pay later” payments on time. These consequences were more prevalent among consumers who used multiple buy now pay later arrangements Affected by the “buy now pay later” platform at the best time of wealth accumulation, the young generation have indulged in overconsumption and have overdrawn their future wealth.

Conclusion

In the contemporary economic environment, “buy now pay later” platforms are becoming more enticing and less regulated. The reason why ASIC supervised Afterpay was not to challenge the inherent financial system, but to protect those who take greater risks due to the cost of “buy now pay later” arrangements.

What we should make sure is that the purpose of financial innovation is making the financial system serve people better, rather than becoming a tool to exploit investors and pass risks on to the financial market.