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If you are one of the many Australians using ‘buy now pay later’ services, you may want to compare providers and consider if it’s the right payment option for you.
We break down how buy now pay later generally works and the main costs involved.
Find out more about these type of services:
Buy now pay later (BNPL) is a service that allows consumers to purchase goods or services and pay for them in instalments over a period of time. It has some similarities with the lay-by system you might have used previously. Whereas lay-by involves a store putting goods aside for you and then you paying for them in two or more instalments before taking them home, BNPL services generally involve the provider paying the retailer for the goods upfront, allowing customers to take their purchases home immediately. The customer then pays for the goods in instalments, which go to the BNPL service instead of the store. BNPL services can be used at a growing number of retailers in Australia, in-store or online.
BNPL services are offered at certain retailers as another method of payment, as an alternative to buying something with cash, a debit card, a credit card or a PayPal account, though PayPal has confirmed it will be expanding from its current payments service to also offer BNPL in Australia from June 2021.
You can usually apply to use BNPL via the provider’s app or website and then log into your account during an online transaction, or generate and display a purchase code via the app in a store. Alternatively, you could set up an account for the first time during the transaction process at a retailer, and wait to receive approval from the BNPL provider for your spend amount. Approvals for BNPL are generally processed shortly after you provide your details.
Whether or not you can use BNPL will depend on if the retailer is partnered with your service of choice. Some BNPL providers may also do a credit check on you, so you may not be approved if you have a poor credit rating.
BNPL can allow customers to buy things without having to take out a traditional loan or, credit card, and without having to pay interest (in some cases). However, there are often late payment fees and other costs attached, and the payment method could wind up costing you extra money, much like a credit card or personal loan would.
The repayments you have to make would typically be deducted automatically from the card or bank account you have attached to your BNPL account. This happens at regular instalments – commonly fortnightly, but check with your BNPL provider to confirm the details of this. If you don’t have enough money in your account at the time of the deduction, the BNPL provider may charge you a late fee, and your bank may also charge you an overdraft fee, or interest if you’re paying by credit card. Some BNPL services may also charge additional fees, such as account-keeping fees, or interest if you fail to fully repay a purchase within a certain timeframe.
You might think a service like BNPL would mainly be used to buy relatively low-cost clothes and accessories, but this is not necessarily the case. For instance, depending on the provider you choose, you can use BNPL to pay for more expensive goods and services such as IVF treatment, purchasing glasses or contact lenses, going to the dentist or getting veterinary care for your pet.
The BNPL industry has changed the payments landscape in Australia, with the services being used as a spending and budgeting tool by some, but racking up debt for others.
The Australian Securities and Investments Commission (ASIC), a key regulator in the financial services industry, released a report on the industry in November 2020 that revealed the substantial growth to the sector. The number of BNPL transactions in Australia increased from 16.8 million in the 2017-18 financial year to 32 million in 2018-19, representing an increase of 90%.
As a result, there was a considerable increase in BNPL debt in 2020, as revealed in Canstar’s latest Consumer Pulse Report. Close to one in five (18%) people surveyed said they had debt in the form of one BNPL service, up from 10% in 2019. The majority (56%) of Australians with debt still held most of it on a credit card, but that was down from 67% in 2019.
While the usage of BNPL services continues to rise, the industry – which is exempt from some of the regulation applied to other forms of credit such as the National Credit Code – hasn’t escaped scrutiny about how vulnerable consumers could be accumulating more debt and be worse-off financially by using these payment methods.
On 1 March 2021 a group of eight of Australia’s largest BNPL companies signed up to a voluntary ‘code of practice’, which they drafted in consultation with ASIC. The code sets out the minimum standards the companies need to meet, including a cap on late fees, credit checks being required on transactions of more than $2,000 and a minimum age of 18 years for customers to be able to use the services.
It applies to Afterpay, Brighte, Humm, Klarna, Latitude, Openpay, Payright and Zip at this stage, and PayPal has indicated it is looking at the code, having announced it will enter the Australian BNPL space in the coming months.
The companies signed up have so far managed to side-step much of the government regulation that applies to more traditional lines of credit, such as credit cards and personal loans.
The voluntary code was introduced in response to a Senate inquiry two years ago that called for greater safeguards for customers via self-regulation, and comes not long after a November 2020 report that found Australians had almost doubled the amount of credit taken out via BNPL providers in the space of a year.
BNPL services can be convenient forms of payment for some, and may appeal to people who want to spread out their payments but still receive a product instantly, without having to use a credit card. But there could also be some of the following significant financial risks involved. For example:
In its November 2020 report, ASIC found one in five consumers in the past year had missed or been late paying other bills in order to make their BNPL payments on time. Missed payments included things such as household bills (44%), credit card payments (32%) and home loan repayments (22%).
ASIC also found some consumers were experiencing financial hardship in an attempt to make BNPL payments on time, with reports of people cutting back on or going entirely without essentials such as meals, or taking out additional loans.
Afterpay, for instance, has been reported to make a significant chunk of its income from late fees, although the majority of its revenue comes from retailers paying to be on the platform. It implemented a cap on late fees in 2018 following scrutiny of its business model by consumer groups and regulators, cutting off fees for each order above $40 at 25% of the purchase price or $68 (whichever is lower). For orders less than $40, a maximum of $10 in late fees can be applied per order.
The voluntary code of practice also stipulates that late fees will be “fair, reasonable and capped”, and that BNPL services will notify customers of upcoming payments. It suggests getting in touch with your provider if you think you might be unable to make a payment on time. It could be a wise idea to check the service’s policy before signing up.
ASIC stopped short of recommending new consumer protections for the BNPL industry, in its review published in November last year. The industry is not currently subject to the National Credit Code, meaning customers who use these services do not have the same degree of protection as they do with credit cards or personal loans, which are regulated by the Code. It also means there is no legal requirement for a BNPL service provider to adhere to responsible lending obligations, such as by checking if you can actually afford to make the repayments, though this step has been added into the voluntary code of practice.
BNPL providers have previously argued that applying the National Credit Code to their industry would slow down the approval process for customers, which currently tends to be rapid and easily accessible in most cases.
As part of its recent Consumer Pulse Report research, Canstar asked consumers what form of payment they felt was more financially responsible: a credit card or buy now, pay later services such as Afterpay and Zip. Of those surveyed, 60% said they viewed credit cards as more financially responsible, down from 68% the year before.
The younger generations had a more favourable opinion of buy now pay later services, however. Canstar’s research showed 62% of Gen Z respondents thought buy now pay later was more financially responsible than using a credit card, while only 27% of Baby Boomers thought so.
Under the voluntary code of practice, BNPL providers will be required to perform a credit check or similar evaluation on new customers who request transactions of more than $2,000, using their income and expenses data or by checking a credit file. Spend limits above $15,000 must check both these sources. Spend limits of $2,000 or less (or $3,000 for existing customers) don’t require a credit check using external data, but other checks will be necessary, such as ensuring the customer can afford to make the first payment up front and not allowing more purchases if you miss a payment.
It’s worth also noting that your credit score may be affected in other ways if you use these services, according to ASIC. This is because if you take on more credit than you can afford and can’t keep up with repayments, your BNPL provider may report any late payments or defaults to credit reporting agencies.
If you’d like to read more information about buy now, pay later services, you may be interested in the following articles:
Affirm is a United States-based buy now pay later company and one of the largest in the world. It is rumoured to be considering expanding its operations to Australia.
It remains to be seen how Affirm will operate when or if it launches in Australia, but in the United States, the provider allows its customers to apply for a loan and purchase goods via a virtual card in the app.
It offers monthly repayment schedules over the course of three, six or 12 months, but also has options up to 48 months for “really large loans”.
It doesn’t specify a credit limit on the Affirm website, but says there is no limit to how many purchases you can have at one time.
Affirm charges interest, depending on the size of the loan, though the amount of interest charged is not specified on its American site.
It doesn’t charge any late fees, prepayment fees, annual fees or fees to open and close accounts.
Afterpay is Australia’s largest BNPL platform and is widely regarded as the industry pioneer. It is a payment platform which allows customers to buy a product in-store or online now and pay for it later interest-free instalments.
Customers can buy clothing, baby products and more, as well as pay for Airtasker jobs.
Soon, people will be able to bank with Afterpay.
Afterpay allows users to pay in four evenly split, interest-free fortnightly payments.
Shop online: Choose Afterpay as your payment method at the checkout.
Shop in-store: Open your Afterpay app to scan your barcode for payment at the checkout.
For both online and in-store transactions, Afterpay says it takes the first repayment (usually 25% of the total purchase price) from customers at the time of purchase. It also says it sometimes carries out a “pre-authorisation check” by taking a small amount from a customer’s account – up to the value of your first instalment plus 1 cent for online purchases and up to 25% of the value of an in-store barcode plus 1 cent – to make sure the customer’s nominated repayment card is working. Following the check, Afterpay says these transactions will be voided so customer are not charged.
A late payment fee of $10 applies for missed payments, but it does not accumulate above 25% of the purchase price or $68 (whichever is less), or above a single $10 fee for purchases under $40.
Payment plan for homeowners to pay for solar, batteries and various home improvements over time.
Step 1: Request quotes from Brighte vendors on the Brighte marketplace online.
Step 2: Apply for the 0% interest payment plan online or via the app.
Step 3: Payment plan activated once the vendor has completed your job.
Payment plans: You can apply for a 0% interest plan for payments of up to $30,000. You can also request pre-approval for payments of up to $15,000. Additional fees and charges may apply.
Payment platform that says it will allow users to make delayed payments for everyday spending on any personal or household purchases – such as groceries and fuel – at stores that accept Mastercard.
Shop online: Use the digital card from your Bundll app to pay for online purchases at merchants that accept Mastercard transactions.
Shop in-store: Use your digital card stored in your Digital Wallet to make transactions in-store at merchants that accept Mastercard transactions.
Credit limit: A $180 minimum credit limit applies or $0 for the superbundll credit limit. Bundll states the maximum credit limit is $1,000, or a combined limit of up to $4,000 with the superbundll ($1,000 for bundlls and $3,000 for superbundll).
Australia’s largest bank, the Commonwealth Bank, is set to launch its own buy now pay later offering from mid-2021 that will allow customers to split payments over six weeks.
It takes the form of a digital card that customers will be able to add to their CBA app or digital wallet and use anywhere Mastercard is accepted. It’s available for purchases between $100 and $1,000, with payments to be split into four fortnightly instalments starting at the time of purchase and charged to an eligible CBA bank account.
Commonwealth Bank says it will charge a late fee of $10 per missed instalment and that this will be capped at $120 per year. It says there will be no ongoing fees or foreign transaction fees.
Buy ‘Little things’ or ‘Big things’ (as Humm classifies different spend types) and pay it back in fortnightly or monthly repayment plans. Customers can buy clothes, jewellery and watches, solar energy, bedding and more.
Pre-approval: Tell Humm, via the app, how much you would like pre-approved for spending, or they can also pick a limit for you. This process will require providing your bank statements. Pre-approval lasts 60 days.
Shop online: Choose Humm as your payment method at participating retailers and pay your first instalment upfront.
Shop in-store: Display your Humm barcode in the app to staff at the retailer and they will be able to access your pre-approved spend amount.
Spend limits: Up to $2,000 for “Little things” or up to $30,000 for “Big things”.
Klarna has a shopping app, where customers can buy items using a buy now pay later system. Users can also shop at individual retail sites outside the app, as long as that retailer allows Klarna payments. The Stockholm-based company launched in Australia in January 2020 and is part-owned by the Commonwealth Bank.
Klarna lets you pay in four fortnightly instalments with no interest using its BNPL function. The first payment will be charged when the seller confirms your order.
Klarna late fees are dependent on the amount spent:
Klarna customers can opt to ‘snooze’ their repayments temporarily to avoid late repayment fees on purchases valued at more than $60, but will be charged for choosing this option based on the value of the order being snoozed.
Payment platform that allows customers to buy items such as appliances, pet products and homewares in interest-free repayments.
Shop online: Choose Latitude Pay as a payment option at the online checkout, apply for an account if it’s your first time (approval is typically instant, the provider says) or login, then pay 10% of the purchase price upfront and the rest later.
Shop in-store: Create an account online and ask to use Latitude Pay at the checkout. You will receive a text message with a link to enter your payment details, then wait for approval before paying the 10% upfront charge.
Credit limit: Up to $1,000.
A payment solution – not to be confused with the lay-by payment system – that allows customers to buy items and pay for them over time with interest-free repayments.
Shop online: Create a Laybuy account on its website or at the checkout, at which time Laybuy will perform a credit check and then, if approved, assign your spending limit. You will then be able to make a purchase. Laybuy has an app where you can check your balance, upcoming payments and updates from the provider.
Payment plans that allow you to pay for things over time, such as clothes, servicing your car or going to the dentist.
Shop online: Choose Openpay as your payment method at the checkout, and pay your first instalment on the spot, which is usually 20% of the purchase price.
Shop in-store: Open your Openpay app to scan your barcode for payment at the checkout, where you will be charged the first instalment on the spot, which is usually 20% of the purchase price.
PayPal is a platform that allows users to send and request money, as well as make payments when online shopping rather than using your credit or debit card. The company has announced it will also bring BNPL to Australia from June 2021, in the form of its “PayPal Pay in 4” product.
With Paypal Pay in 4, customers will be able to spend up to $1,500 and pay it back in four equal fortnightly instalments, interest-free. The first instalment will be due at the time of purchase.
PayPal will charge a $10 fee for a missed Pay in 4 payment, capped at $30 for purchases over $125, or $10 for purchases under $125.
Payment platform that allows customers to shop for items or services and pay for them over time. Customers can use Payright for dental work, camping equipment, beauty appointments and more.
Shop online: Choose Payright as your payment option, complete the application process (which typically takes a couple of minutes) and get instant approval.
Credit limit: Up to $10,000.
Payment plan for online purchases, with payments split equally over six weeks. Customers can buy electronic appliances, clothes, beauty products and more at participating retailers.
Select Sezzle as a payment method at checkout. You’ll be notified of what payment plan you’re approved for at checkout, including how much is due upfront (typically around 25% of the purchase price) and when the next scheduled payments will be.
Split payments for a purchase using your existing debit or credit card. Purchases could include beauty and fashion products, electronics and jewellery.
Credit card: Splitit requests authorisation from your lender to reserve the total purchase amount from your line of credit, then charges the instalment each month. They continue to request authorisation for the remaining balance each month.
Debit card: Splitit requests authorisation from your institution to reserve the total purchase amount from your account, and then at the time of purchase you’ll be charged the first payment. The entire amount is held on your debit card temporarily and released within five business days.
No fees or interest applicable outside of your usual credit card charges.
Splitit’s website indicates the company makes its money by charging merchants fees to use its services.
Buy products now and pay for them later using your Zip account. Zip Money is not interest-free, but allows for larger purchases than Zip Pay. Participating retailers include Officeworks, Kogan and Fantastic Furniture.
Shop online: Select Zip Money as your payment method at the checkout and enter your six-digit code received via SMS.
Shop in-store: Open the Zip app to have your barcode scanned. If the order amount is greater than your available funds, you may be able to get a credit limit increase or split payment methods with the retailer.
Credit limits: Above $1,000. You can request a credit limit decrease, or increase of up to or above $5,000.
Zip Pay is an interest-free BNPL method. Participating retailers include Bunnings, Kmart and Target.
Shop online: Select Zip Pay as your payment method at the checkout. Zip Pay says it will pay the store for you, meaning you pay nothing upfront. Alternatively through the provider’s ‘Tap and Zip’ function, if you have connected your Zip Pay account to Apple Pay or Google Pay on your phone, you can select either of these payment methods at the checkout. Zip Pay says you can also use its app to generate a single-use Visa card to shop online inside.
Shop in-store: Zip Pay says its ‘Tap and Zip’ feature is the main way to pay for goods in-store. This works by allowing users to add a Visa card associated with their Zip Pay account to Apple or Google Pay on their mobile device. Users can then pay in-store using Apple Pay or Google Pay anywhere these payments methods are accepted.
Credit limits: Maximum of $1,000.
Feature image: Sashkin/Shutterstock.com