The true cost of Buy Now Pay Later

Accessing BNPL is much easier and faster than applying for a credit card, and unlike a credit card, consumers can pay the item off in instalments with no interest. This is made possible as BNPL providers charge the merchants a small portion of each sale, and only need to charge customers late fees if they fail to meet their repayments.

Cost to merchants

Currently, merchants pay anywhere from 2-8 per cent merchant service fees on BNPL transactions, well above the 1.25-1.5 per cent credit card transaction fees paid by SMEs. BNPL providers themselves make around 90 per cent of their revenue from merchants, and while justifying the higher costs as marketing tools, they are in essence a payment type offering credit facility.

Growing in popularity

RBA’s latest data confirms the popularity of BNPL, showing in FY22 there are roughly 7 million active BNPL accounts and $16b spent, which is an increase of 37 per cent over the previous year. On the other hand, RBA data shows the number of active credit card accounts for the period of June 2021 to June 2022 fell by 1 per cent, and the number of cards in circulation (some people have multiple) fell by 2 per cent.

Rising concerns for consumers

This year, ASIC released a report before interest rates started to increase, showing 1 in 5 Australian consumers were actually missing their payments under BNPL schemes.

A rising number of consumers have been using BNPL for everyday groceries – where there is no incentive of convenience, loyalty points or rewards that has made traditional credit products popular – and this is a warning sign of “financial distress” over “financial convenience” for the consumer.

Another worrying sign is the increasing usage to pay off one BNPL product with another BNPL – whereas credit cards cannot be used to pay another credit card’s debt.

These distressing trends illustrate many Australian’s using BNPL payments are “stuck in a revolving door” of debt, and the industry’s issues, including lax lending practices, lack of credit checks, poor complaints handling, poor disclosures, disproportionate fees and charges, lack of reporting, and no regulatory oversight, must be addressed now as the interest rate cycle bites consumer affordability.

Consumer Data Right

In addition, there are concerns from consumers and retailers alike around the data rights, protection and security around consumer information. Consumer Data Right (CDR) was passed as law in 2020 which aims to provide Australians with more control over how their data is used and disclosed. At the core of the CDR and the open banking program is a more robust, secure and private way for entities to share data about consumers and their accounts; however BNPL providers are currently excluded from these measures, and data security can become a bigger problem when a customer transfers from one provider to another.

Regulator intervention

In response to these issues, the Albanese Government is considering new laws to protect consumers following concerns people are obtaining credit beyond their financial means.

In late November 2022, the Federal Treasury issued the Regulating Buy Now, Pay Later in Australia - Options paper seeking consultation on a regulatory framework, open for feedback until 23 December 2022.

In this framework, Treasury has provided three potential options including:

1. strengthening the current code of practice and introducing an affordability test;

2. requiring an Australian credit license with reduced compliance under the Credit Act; and

3. increasing regulation under the Credit Act. Currently some BNPL industry participants have subscribed to a voluntary code of practice.

If “consumer harm” protections are the central ethos to the proposed Government measures, then should BPNL providers adhere to regulations that are similar to what credit card providers must currently abide by?

If Australia were to introduce tougher BNPL restrictions, it could pave the way for additional countries to consider implementing more regulations.

Considerations for retailers

Regardless of the outcome of the paper, from a retailer’s perspective there are still many questions that remained unanswered. How are retailers protected from consumer harm impacts when any regulation is minimal? Should retailers be relying so much on expensive BNPL products to boost their sales and lower their already squeezed margins? How can the retailers and merchants have more control over BNPL sales and ultimately their bottom line?

It is clear that BNPL providers may need to re-think their long-term customer acquisition and relationship strategy and move away from simply being a marketing tool for retailers. If BNPL providers were to become a sales tool with benefits, including elimination of the losses of unclaimed lay-buys, lower inventory costs, and immediate sales revenues, these benefits would cross both sides of the retail industry.

Grant Thornton’s specialist Merchant Payments Advisory practice can assist your business. Please contact your Grant Thornton representative or our Merchant Payments Advisory practice directly.