Innovation, Disruption and Consumer Harm in the Buy-Now-Pay-Later Industry

Buy-now-pay-later (‘BNPL’) is an international phenomenon, with more than 2.5 million daily active users worldwide.  Since emerging in the Australian market in 2015, it has become firmly established in many developed economies.  Although Australians are still among the most prolific users of BNPL, the product is rapidly gaining popularity in the United Kingdom, the United States, Sweden, Norway, New Zealand, China and Singapore.  Global BNPL sales increased more than six times over between 2019 and 2023, fuelled by consumers’ growing preference for online shopping.

BNPL allows consumers to buy and receive goods or services immediately and pay for them over time, usually in four equal instalments.  Originally marketed as a way to spread the cost of small discretionary items such as clothing and footwear, it can now be used to purchase a wide range of goods and services, including car repairs, dentistry and airline tickets, as well as furniture and groceries.  Providers claim that the product generates higher sales while helping consumers to ‘manage their spending responsibly’. Yet there are growing concerns that the product can encourage ‘imprudent’ spending and lead to excessive indebtedness.  Some consumer advocates argue that the product is causing significant harm, particularly among vulnerable cohorts.  

Australia is at the forefront of global efforts to regulate BNPL.  Currently, Australian BNPL providers operate in a regulatory ‘grey zone’ outside the scope of consumer credit laws.  The Australian industry has developed a voluntary Code of Practice (‘the AFIA Code’).  This grants consumers some limited rights, including the rights to seek hardship assistance and to lodge complaints with the Australian Financial Complaints Authority.   Yet BNPL is not currently subject to the National Consumer Credit Protection Act 2009 (Cth) (or ‘NCCPA’).  This legislation requires most providers of consumer credit to comply with ‘general conduct’ rules, including a duty to offer their services ‘efficiently, honestly and fairly’.  It also imposes ‘responsible lending obligations’ (‘RLOs’) on lenders, requiring lenders to assess consumers’ finances before offering them credit.

In November 2022, the Australian Government set out three potential models for regulating BNPL: the first, an enhanced form of self-regulation, with an updated industry code; the second, full application of the NCCPA, including the RLOs; and the third, a ‘modified’ application of the NCCPA, with unique RLOs ‘scaled to the level of risk’ posed by BNPL products.  In May 2023, the Government confirmed its intention to bring BNPL within the ambit of the NCCPA, adopting the third approach, a ‘tailored’ version of the RLOs.  It pledged to release draft legislation by the end of 2023.  Yet in December 2023, it revealed that it would not meet this deadline, citing ‘resourcing pressures’ on its legislative drafting teams.  Consumer advocates note that the Government’s decision to implement ‘modified’ or ‘tailored’ RLOs has made the task of drafting legislation ‘far more complex’.

New research from Melbourne Law School draws upon a series of focus groups with consumer advocates and an online survey of 1,128 consumers who have used BNPL, either alone or in conjunction with payday loans or pawn loans.  This data confirms that some users of BNPL are highly vulnerable.  The study finds that some consumers can become caught in a BNPL ‘debt spiral’, devoting large proportions of their incomes to their BNPL payments and then being forced to use the product again, to purchase groceries and other essentials.  It finds that the risk of overcommitment is higher when consumers use multiple BNPL products simultaneously and that at present, there are no effective mechanisms to prevent this.  The study also finds that the AFIA Code has failed to provide consistent, meaningful protection to vulnerable consumers.

Counterbalancing these findings, the study identifies some tangible benefits associated with BNPL, at least in comparison with other forms of credit.  The survey data indicates that most consumers who have used BNPL are satisfied with the product.  It also suggests that, according to consumers who have used BNPL in conjunction with other products, BNPL is significantly cheaper and less harmful than payday loans or pawn loans.  The focus groups reveal that BNPL is particularly valued by some low-income earners as a way of meeting large and urgent expenses, such as car repairs.  The study identifies a risk that if consumers could not access BNPL for such purposes, some would resort to much more expensive forms of credit, particularly payday loans.

On this basis, the study supports the Australian Government’s proposal to apply a ‘modified’ form of the RLOs to BNPL.  It shows that while BNPL carries risks, particularly for vulnerable groups, it also helps some consumers to meet urgent expenses in a flexible and cost-effective way.  It concludes that the Government’s preferred approach will reduce the risks posed by BNPL while preserving access to a source of credit that has some comparative advantages for low-income earners.

The authors’ complete article is available here.

Lucinda O’Brien is a Research Fellow at Melbourne Law School.

Ian Ramsay is a Redmond Barry Distinguished Professor Emeritus at Melbourne Law School.

Paul Ali is an Associate Professor at Melbourne Law School.