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16 December 2021Buy Now Pay Later Project TeamConsumer and Competition Policy TeamBuilding, Resources and MarketsMinistry of Business, Innovation and EmploymentPO Box 1473Wellington 6140By email: [email protected] Buy-Now, Pay-Later Discussion Document1. IntroductionThank you for the opportunity to make a submission on the Buy-Now, Pay-Later (BNPL)Discussion Document. This submission is from Consumer NZ, an independent, non-profitorganisation dedicated to advocating on behalf of New Zealand consumers. ConsumerNZ has a reputation for being fair, impartial and providing comprehensive consumerinformation and advice
Contact: Aneleise Gawn Consumer NZ Private Bag 6996 Wellington 6141 Phone: 04 384 7963 Email: [email protected]2. General commentsConsumer NZ supports regulation of BNPL services. Unlike other lenders, BNPL providershave no obligation to ensure their lending is responsible. This is causing harm toconsumers and needs to be addressed
We do not consider maintaining the status quo or introducing an industry code willprovide adequate protection for consumers. Other countries are taking steps to regulatethe BNPL sector and we recommend the New Zealand government does the same
Without regulation, the risk remains that consumers will be harmed by using BNPLservices
We also consider other forms of deferred payment should be brought under the creditregime. For example, consumers are often persuaded to purchase expensive mobilephones on contracts that they pay off over several years. In our view, this is a form ofcredit and should fall under the Credit Contracts and Consumer Finance Act (CCCFA)
3. Answers to questionsOur answers to specific questions are set out below
Thank you for the opportunity to provide comment. If you require any furtherinformation on the points raised, please do not hesitate to contact me
Yours sincerelyJon DuffyChief Executive Submission on Buy-Now, Pay-Later: Understanding the triggers of financialhardship and possible options to address themYour name and organisation Name Aneleise Gawn Organisation (if Consumer NZ applicable)ResponsesQuestion 1: Do you agree with our assessment of what the benefits are fromBNPL? Yes / No / Not sure? Are there others? Please provide details
Yes, we agree with the benefits set out in the discussion document
Question 2: As a consumer (or consumer representative), please outline whatare the benefits of BNPL?Feedback we have received indicates BNPL is a popular choice with consumers. Wheninstalments are repaid on time, it can offer a lower cost alternative to credit cards andother forms of short-term credit. It also allows consumers to spread the costs of theirpurchase over a longer period and take advantage of sales when they occur. BNPL alsoprovides instant access to goods and services that the consumer may not otherwise beable to afford
Question 3: As a business accepting BNPL to pay for goods and services, pleaseoutline the benefits of BNPL? If you are a small business, are there anyadditional benefits from accepting BNPL?No comment
Question 4: Do you agree with our assessment of how BNPL will evolve in NewZealand? If not, please provide details
We agree BNPL will continue to grow and evolve in New Zealand and this is likely todisrupt the credit and payment industries, although more extreme disruption may becountered by mainstream banks becoming more active with BNPL offerings. However,irrespective of the degree of disruption, without regulation, we are concerned theevolution of BNPL in New Zealand will result in an increase in financial hardship forconsumers
Question 5: How do you think emerging BNPL business models e.g
partnerships with credit cards, banks etc. will impact consumers? Pleaseprovide detailsAlthough emerging BNPL business models may have some positive impacts onconsumers, we are concerned the unrestrained growth in the sector and emergingbusiness models will also have negative impacts on consumers
For example, the new service Bundll can be used anywhere that accepts a Mastercard. Itdoesn’t rely on a retailer signing up to the scheme and no payment is required up front
This means a consumer could purchase almost anything, without parting with any moneyat the time of purchase. So, a consumer could potentially use Bundll to pay for a night atthe pub, alcohol, Lotto, betting at the TAB, online casinos etc. In our view, this is likelyto encourage impulsive and socially irresponsible spending. And although personalresponsibility plays a role and a consumer could do the same using a credit card, theywould be covered by the protections in the CCCFA when doing so
Consumers can “snooze” or delay their Bundll repayments as often as they like bypaying a $5 fee. Although this may seem like a useful option for consumers it could alsomean the purchaser ends up paying significantly more for their purchase than theoriginal cost
We consider these sorts of developments pose a serious risk of harm to some consumersand ought to be regulated
Question 6: Do you agree or disagree with our summary of the types offinancial hardship that could occur from BNPL? Please provide detailsWe agree with the summary of the types of financial hardship that can occur from BNPL
In particular, we agree financial hardship can occur both when instalment payments aremissed, and when they are not missed
Question 7: As a consumer (or consumer representative), have you facedfinancial hardship from BNPL? Yes / No / Prefer not to answer? If yes, underwhat circumstances have you faced financial hardship from BNPL? Please selectall that apply and provide details, if possible: • You had multiple BNPL accounts • Your credit limits were increased beyond what you could afford • Because of the timing of your BNPL instalments and other expenses • Because as a household, you were unable to afford the BNPL instalments • You focused on the first payment rather than the total cost of the product or service • You responded to BNPL marketing and as a result purchased more than you could afford • You missed an instalment and faced missed fees (default fees) • Your circumstances changed (e.g. change in employment) and you were no longer able to afford the instalments • OtherWe have heard anecdotal evidence of financial hardship arising from BNPL from financialmentors and other consumer organisations. For example, we have heard of consumers infinancial hardship with up to eleven BNPL debts and debts totalling more than $3000
Others are paying off their BNPL debts before putting petrol in their cars or paying theirelectricity bills. Increasingly, BNPL is being used by vulnerable consumers to plug thegaps when they are struggling to make ends meet
As a result of our concerns about BNPL and the fact it falls outside of the CCCFA, weconducted a nationally representative survey in April and May 2021 of 2001 people. Atotal of 752 of the 2001 respondents had used BNPL
Our survey found close to four out of 10 consumers use BNPL services. Almost one infive consumers are using BNPL for essentials, such as groceries and car repairs. Fifty-fivepercent of BNPL customers said the payment option had encouraged them to makepurchases they would not otherwise have made. And 14% of consumers have beencharged late fees. We estimate this could be costing consumers over $10 million peryear
Our most recent Consumer NZ Sentiment Tracker data (from October 2021) showed thatof those with personal debt, 21% have BNPL debt. Our data also showed 55% pay fortheir debt on debit card and 39% on credit card
Question 8: Do you live in a household with multiple BNPL accounts? Yes / No /Prefer not to answerNo comment
Question 9: As a BNPL consumer (or consumer representative) (select oneonly) A) Do you value having a hard credit check being conducted OR B) Would you prefer a soft credit check that doesn’t leave a ‘footprint’ on your credit score?Please explain the reasons for your answerAlthough some consumers may prefer a soft credit check, in our view, these types ofchecks are not adequate. Where BNPL providers only do soft credit checks, they areunable to see whether the consumer currently has debt obligations to other BNPLproviders or has previously defaulted on debt obligations. This information is importantin assessing whether a consumer can take on future debt obligations
Question 10: What are the advantages and disadvantages (including costs)from credit checks being used to determine approval for BNPL?Hard credit checks do have some advantages over soft credit checks. For example, theyprovide a more detailed picture of a consumer’s credit status. Also, the extra step andthe fact that a credit check is required may help consumers understand they areapplying for a type of credit, and not just buying now and paying later with noconsequences
However, we do not support credit checks being used as the sole determinant forapproval of BNPL because they do not assess affordability. Also they leave a ‘creditfootprint’ on a credit score, which potential lenders can see. Future lenders may see thisas a sign that a consumer is struggling with debt obligations and be less inclined toprovide credit in future
Question 11: What other/additional steps could BNPL providers take to assessaffordability for consumers? What are the disadvantages (including costs) ofthese steps? What are the benefits of these steps?We consider BNPL providers should be required to take similar steps to other creditproviders to assess affordability
The disadvantages of requiring affordability assessments are that the process could takelonger, consumers would be required to provide more information and there would besome additional costs to providers
Providers’ revenue is also likely to be impacted (given the amount they currently earnfrom late fees), but we do not consider this to be a disadvantage
We agree open banking has the potential to reduce operating costs by allowing providersto make more accurate lending decisions
Benefits of assessing affordability include ensuring consumers don’t take on unaffordabledebt and that BNPL debt is treated the same as other debt. It would also remove theonus from individual consumers to assess affordability (which young, vulnerable orconsumers with low financial literacy may not be equipped to do) and help ensure aconsistent approach amongst BNPL providers. Affordability assessments also gives theconsumer more time to consider whether they need to make the purchase and whetherthere may be an alternative to fund the purchase
Question 12: How might affordability assessments be conducted when BNPLcredit limits are increased?A consumer’s financial situation can change overnight so we consider that BNPL creditproviders should conduct further affordability assessments before credit limits are raised
Even if a consumer has never missed a payment, this doesn’t mean they are immune tofinancial hardship, especially as credit limits increase
As noted in the Discussion Document, consumers may meet their repayments, but missother regular payments e.g., utilities or essential goods and services. This type offinancial hardship is not easily visible to BNPL providers, as the provider is not directlyaffected
If a consumer’s credit limit is increased when they are experiencing this kind of financialhardship, it is possible the consumer may be incentivised to make more purchasesthrough BNPL, worsening the cycle
However, if an affordability assessment was conducted, it would highlight if a consumerwas experiencing financial hardship, and if they were, the credit limits would not beincreased
Steps could also be taken to help the consumer experiencing hardship
Question 13: What are the costs and benefits of conducting affordabilityassessments when BNPL credit limits are increased?We think the costs and benefits of conducting affordability assessments when BNPLcredit limits are increased are similar to those set out under question 11 above
Question 14: Are there any other ways to ensure BNPL credit limits areincreased responsibly?We do not think limits should be raised automatically. Rather, credit limits should onlybe raised on request by the consumer, and after an affordability assessment has beendone to determine whether an increase is appropriate
Consumers overseas have reported the continual increase in BNPL spending limits (as areward for making repayments on time) can be like a debt trap encouraging theconsumer to continue to spend up to the limit offered until they can no longer managethe debt
In Australia, the Government has banned unsolicited credit increases to help preventproblematic credit card debt. We would like to see similar rules in New Zealand inrelation to BNPL and other forms of credit
Question 15: Are there any other issues with consumers having multiple BNPLaccounts that we have not identified?No comment
Question 16: How effective and practical would it be to share information withother BNPL providers of consumer accounts which have been frozen?Not effective / Somewhat effective / Very effectiveNot practical /Somewhat practical / Very practicalPlease provide details
We consider it would be somewhat effective if BNPL providers were required to shareinformation with other BNPL providers of accounts that had been frozen. Consumers withfrozen accounts are likely to be at risk of experiencing financial hardship. Sharing withother providers when a consumer has missed a payment and their account has beenfrozen could lead to other providers preventing the same consumer from using theirservice. This would limit the ability of the consumer to incur more debt than they canafford to repay
Any personal information would obviously need to be shared in a manner consistent withthe Privacy Act 2020. Also, we do not endorse data brokerage practices where consumers deemed at higher risk of credit default are sold as leads by higher tier lendersto lower tier lenders
Question 17: How could information about consumers having multiple BNPLaccounts be appropriately shared across the BNPL sector?There could be a central registry that contained this information. We consider closeconsultation with the Office of the Privacy Commissioner in the set up and potentialadministration of a registry would be essential to ensure commercial interests do notoverride the interests of consumers
Question 18: What are the costs (including disadvantages) of the approachesyou describe in Question 17? What are the benefits of the approaches youdescribe in Question 17?Given there are many transactions going through BNPL services, it could be timeconsuming to set up such a registry
The benefits would be that consumers would be less likely to suffer financial hardshipfrom having multiple BNPL accounts
Question 19: What tools and processes could be introduced for the timing ofBNPL instalments to be better aligned to income and other expenses?Consumers should have the ability to choose the dates they want payments to come out(within a set timeframe) and to amend these dates (within limits) at a later stage ifnecessary. Having the ability to amend payment dates could have a substantial impacton a consumer’s ability to make repayments
Question 20: What are the costs (including disadvantages) of such tools andprocesses?There may be some set-up costs in configuring apps to allow consumers thisfunctionality but once completed, we do not consider there would be any major costs
Alternatively, BNPL providers could provide a contact number and email address forconsumers to use if they need to amend payment dates
Question 21: When making BNPL transactions, how could consumers be mademore aware of the total costs of their purchases? What are the costs of thesetools? What are the benefits of these tools?We think any provider should be required to emphasise the total cost, and late paymentfees, rather than just the instalment costs. We also think providers should have to makeit clear that they are providing a form of credit, and the consequences for not makingpayments on time. This would help consumers focus on the overall cost, rather than theinitial instalment. It would also help them understand the nature of the arrangementthey are entering
The use of personal financial management tools may also be useful for some consumers,but we do not consider it would be appropriate to make them mandatory. We supportbetter disclosure and affordability assessments at the outset, rather than giving theconsumers tools to manage debt they shouldn’t have taken on in the first place
Question 22: As a consumer (or consumer representative), what has been yourexperience of receiving help from BNPL provider/s if you missed an instalmentand/or faced financial hardship?We are concerned there are a variety of hardship policies and procedures in place withBNPL providers. In our view, these should be consistent between providers to ensureconsumers are protected in the case of financial hardship. Bringing BNPL under theCCCFA would help ensure a consistent approach
Question 23: How could BNPL providers be more responsive to consumersrelying on BNPL to pay for essential goods and services? What are the costs ofthese tools? What are the benefits of these tools?If a consumer is using BNPL to purchase essential goods and services we think it is morelikely the consumer may be suffering financial hardship. If a consumer regularly usesBNPL services in this way, BNPL providers could be required to recommend theconsumer consults a financial mentor and/or social welfare for assistance
Question 24: Do you have any comments on the diagrams above summarisingthe triggers of financial hardship, how they occur, and the features which couldmitigate financial hardship?No comment
Question 25: Do you agree with our view that the lack of affordabilityassessments is likely to be a key reason why some consumers using BNPL facefinancial hardship?The lack of affordability assessments is a major contributor to why consumers usingBNPL services face financial hardship
We also consider the advertising of these products is likely to be contributing to financialhardship. Advertising is often targeted at young people via social media, normalisesdebt, makes the process seem very easy and can encourage irresponsible spending
Some providers encourage using BNPL to buy essential products such as food. Some alsoencourage spending by offering prizes. Advertisements also downplay the risks involvedwith using a BNPL service
Some examples of recent advertising are set out below: Ads also frequently use influencers and celebrities to endorse their products. Whenpeople see their favourite celebrities or influencers use a BNPL service, this is likely tomotivate them to consider doing the same
In Australia in 2020, an advert starring Rebel Wilson was pulled from Australiantelevision due to complaints the advert minimised the risk and harm of BNPL schemes
In the UK, the Advertising Standards Authority (ASA) banned four Instagram posts from‘influencers’, who were paid by Klarna to advertise their payment service in December2020. All the ads were linked to lifting or boosting mood during the UK lockdown. TheASA concluded the ads irresponsibly encouraged inappropriate use of credit, particularlyin the context of a lockdown and the impact it could have on people’s financial situationsand mental health. The ads were found to be inappropriate because they were effectivelylinking a credit system with improved mood
We recommend further consideration be given to the way in which BNPL services areadvertised
Question 26: Do you have views on the overall objective of the BNPL sector?We support the overall objective set out in the Discussion Document
Question 27: Do you have any views on how the interests of consumers couldbe protected?In our view, the best way to ensure consumers’ interests are protected is to regulate theBNPL sector under the CCCFA
Question 28: Do you have any views on the criteria used to assess how toachieve an effective BNPL sector?No comment
Question 29: Do you have any comments on the discussion of Option One:status quo? Please provide evidence if available
In our view, maintaining the status quo is not an option as it will continue to result inconsumer harm. Consumers will continue to incur late payment fees, get into debt, andrisk having their credit ratings negatively affected. Consumers will also be encouraged tospend, rather than save. We do not consider this will benefit New Zealand in the longterm
Question 30: What are the costs and benefits of Option One for any relevantparties e.g. consumers, BNPL providers, businesses accepting BNPL as apayment option, competitors to BNPL? Please provide evidence if available
In our view, the benefits of Option One apply only to consumers who have theknowledge and capacity to manage BNPL products well. This leaves those consumerswho do not have those skills vulnerable to predatory practices by providers
BNPL providers benefit from Option One as they can continue to earn substantialrevenue in a regulatory environment which turns a blind eye to irresponsible lending
Question 31: Do you have any comments on the discussion of Option Two:Government establishes appropriate incentives for BNPL providers to have anindustry code which addresses the triggers of financial hardship? Pleaseprovide evidence if available
We do not support Option Two. In our view, the level of harm justifies greaterintervention than a voluntary code
A voluntary industry code has been implemented in Australia, but the requirementsunder the code fall well short of responsible lending requirements. Under the code,Australians can still get up to $2000 of credit from BNPL providers without having theirability to repay the money genuinely assessed. In addition, there is insufficientmonitoring and enforcement, and no real consequences for breaching the code. As such,we do not consider the code has been effective at preventing hardship caused by BNPLservices
The recent Royal Commission into misconduct in banking in Australia was critical ofindustry self-regulation codes, noting their limitations and difficulties. The final RoyalCommission report stated standards set in a voluntary code may not be adequate, not allparticipants will be bound by the code, monitoring and enforcement of compliance maybe inadequate and the limited consequences for breach may not be enough to makeparticipants prevent and correct failures. They also noted there was some doubt aboutthe extent to which obligations in a code could be relied on and enforced by individuals
We do not consider an industry code to be an adequate substitute for regulation. We alsodo not see any reason why BNPL products should be treated differently to any otherform of credit
Question 32: What are the costs and benefits of Option Two to any relevantparties e.g. consumers, BNPL providers, businesses accepting BNPL as apayment option, competitors to BNPL providers? Please provide evidence ifavailable
For the reasons stated above, we do not consider this option would provide a satisfactorylevel of protection for many consumers as it will not result in substantial changes in themarket
Question 33: How could Option Three be designed (including the timing ofrequirements) to ensure the BNPL delivers long-term benefits to consumers?Please provide evidence if available
In our view, the regulations need to be designed to ensure they allow BNPL serviceproviders to continue to offer the product but incorporating consumer protections thatare offered to consumers of other credit products
Question 34: What are the costs and benefits of Option Three and how it isdesigned to any relevant parties e.g. consumers, BNPL providers, businessesaccepting BNPL as a payment option, competitors to BNPL providers? Pleaseprovide evidence if available
Although this is likely to be the most expensive option, it is also the option that will bestprotect consumers and meet the objectives stated in the Discussion Document
Regulation will force providers to provide adequate disclosure, lend responsibly, offercooling off periods, enable hardship applications, ensure fees are reasonable, andprovide dispute resolution for consumers. It will also ensure fewer consumers get intofinancial hardship
Question 35: Do you have any suggestions on how we could measure and trackprogress against whether BNPL is delivering long-term benefits to consumers?Please provide evidence if available
We consider there needs to be a review within 12 months to 2 years of any option beingadopted to ensure it is providing the benefits anticipated and not resulting in anyunexpected issues. We also recommend the Government engages with financial mentors,consumer representatives and consumers to measure and track progress againstwhether BNPL is delivering long-term benefits to consumers
Buy Now Pay Later Project Team Consumer and Competition Policy Team Building, Resources and Markets Ministry of Business, Innovation and Employment PO Box 1473 Wellington 6140 …
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