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A new data sharing initiative between major buy now pay later providers doesn't have enough teeth to prevent lending to people unable to make their repayments, a financial agency says.
PayWatch, which was designed by credit bureau Centrix and buy now pay later (BNPL) providers such as Afterpay, Zip and Laybuy, will share information about a potential customer's credit risk, including if they are behind on repayments to other providers.
Recent data showed a record 10.5 percent of BNPL accounts were in arrears in March, with an increasing number of people saying they used the payment schemes to buy essential items.
However, a senior policy advisor at financial mentoring group FinCap, Jake Lilley, said the initiative doesn't go far enough.
"It's not a requirement to not lend to someone, they might have more visibility, but what they do with that is up to them.
"Credit reporting, in general, is a tool for lenders, it's something in their interest, whereas affordability assessments that you get through regulations, they're there to protect whānau from irresponsible lending."
Lilley said FinCap wanted to see BNPL regulated under specific loan laws to effectively stamp out unaffordable lending.
Ministry of Business, Innovation and Employment officials were considering draft government regulations for the buy now pay later sector to reduce the risk of people falling into a debt trap.
Under the proposed changes, lenders would have to do robust affordability checks for loans of more than $600.
Lilley said that threshold was too high for people on low incomes.
"Most people, when I say $600, know that is a lot of money and especially for someone on job seeker support payments, getting behind $600 on an unaffordable loan can be a real disaster.
"We've argued that the threshold should be from zero, like any other loan, as a protection for people that are not always getting into unaffordable lending."