AUT senior lecturer in finance Ayesha Scott. Photo: Ayesha Scott
New research by the Auckland University of Technology shows young adults are taking on dangerous amounts of debt through buy now pay later (BNPL) schemes like Afterpay and Laybuy.
Co-author and senior lecturer in finance Ayesha Scott said the survey of 705 young adults aged 18 to 34 indicated thousands more could be in serious debt.
"Over 190,000 young Kiwis are likely to be either over-indebted or at severe risk of it," she said.
"Buy now pay later had a really strong link to increased over-indebtedness, above and beyond other debts."
Services like Afterpay let customers buy products in smaller instalments over several weeks, but one in five survey respondents did not view this arrangement as debt.
Photo: 123RF
"Up until very recently, BNPL escaped regulation," Scott said.
"This is because our definition of debt is quite specific: it needs to be more than eight weeks and have an interest rate attached."
Most providers did not fit this definition because they limited the repayment period to six weeks and did not charge interest.
"Due to this loophole in our technical definition of debt, BNPL providers were able to market themselves as not debt, and this messaging and slick marketing has really cut through," she said.
"If it looks like debt, it's probably debt. But due to a technicality, these providers have been able to market themselves as being different."
Almost 70 percent of the survey respondents had used BNPL at least once.
And 20 percent were using it "poorly" by incurring frequent late fees, prioritising repayments over daily expenses, or by borrowing from other providers to repay their debts.
But from September 2024, BNPL providers will be required to perform credit checks on their customers.
Scott said that did not go far enough.
"I think there should be affordability checks," she said. "There absolutely needs to be more oversight and more in-depth regulation that goes beyond what's already been announced."
She said the convenience of BNPL services was not worth the damage it caused to 20 percent of young users.
"We're really promoting and enabling what is a convenient tool at the direct expense of 190,000 young New Zealanders," she said.
"Those who are using it poorly and are getting into trouble with it, they're why those protections are needed."
She said it was important to raise awareness about the darker side of BNPL services.
"What we really want to do is make sure consumers are aware of the pitfalls with these products," she said.
Laybuy managing director Gary Rohloff said the service aimed to mitigate those pitfalls.
"We strongly believe that BNPL should be offered and used responsibly," he said.
"It's for this reason we have always conducted credit checks on customers, meaning Laybuy isn't available to everyone."
He said Laybuy was not offered on daily expenses like grocery, fuel and bills.
"We welcome the government's pledge to introduce appropriate regulation for the sector and think it's important we raise standards across the industry," Rohloff said.
A spokesperson for Afterpay questioned the credibility of AUT's survey.
"Surveying 705 young adults aged is neither nationally representative nor reflective of the way Afterpay is used, more broadly according to Afterpay data," they said.
They pointed to an August Cabinet paper by the Ministry of Business, Innovation and Employment (MBIE) that noted it was "difficult to demonstrate a clear relationship between BNPL and financial hardship as no substantial quantitative data exists due to the relative newness of the sector and difficulty in assigning causation".
The spokesperson said 98 percent of purchases through Afterpay did not incur late fees, and 95 percent were paid on time.
Commerce and Consumer Affairs Minister Duncan Webb. Photo: RNZ / Samuel Rillstone
Commerce and Consumer Affairs Minister Duncan Webb said BNPL services would be exempt from affordability assessments because they were different from other forms of lending.
"Buy now pay later schemes are interest-free contracts for relatively small amounts of money," he said.
"They are relatively low-risk, and requiring a full affordability assessment would be disproportionate and could see access to this useful form of cheap credit withdrawn."
But Webb did not rule out further regulations in the future. "If there is evidence that these measures are not working, further regulation will be considered," he said.