EXCLUSIVE: ‘Have it all…but at what cost?’ – Fiona Guthrie, Financial Counselling Australia in ‘The Fintech Magazine’

Fiona Guthrie, CEO of Financial Counselling Australia, believes BNPL providers might be flying now, but will pay for it later, if not brought into the same regulatory framework as other forms of credit

Buy now, pay later (BNPL) is enjoying a worldwide explosion, thanks to the ease with which it enables customers to have what they want, when they want it – usually interest-free and paid down over instalments – with a quick swipe or click and barely a whiff of a credit eligibility check. The likes of Europe’s Klarna, America’s PayPal with Pay In 3, and Australia’s Afterpay and Zip are extending their point-of-sale credit facilities to millions more customers every week, and boasting unprecedented business growth as a result.

In fact, Worldpay predicts the value of the worldwide BNPL market will rise by 177 per cent, from $60billion in 2019 to $166billion by 2023, or roughly five per cent of global e-commerce, excluding China. Leading Swedish player, Klarna, established in 2005, recently secured new equity funding of US$639million from SoftBank’s Vision Fund 2 and existing investors to fund further global expansion – but particularly in the US. It has seen users almost double there, from 10 million in Q3 2020 to 18 million today.

The darling of the venture capitalists, BNPL presents undoubted opportunities for merchants and financial services providers to grow their balance sheets. But Fiona Guthrie’s organisation, Financial Counselling Australia (FCA) – a country that, with the UK, has led the world in BNPL adoption by consumers – is seeing a downside. And that’s because the FCA deals, first-hand, with the less positive impacts of this, so far unregulated, credit trend on vulnerable customers. She’s not alone in worrying that BNPL encourages them to amass levels of debt they can’t cope with.

Not-for-profit FCA badges itself the ‘national voice of the financial counselling profession in Australia’, providing resources and support for counsellors, increasing awareness of and access to debt advice, lobbying for fairer marketplace practices and pushing for improved ways of dealing with people in financial difficulty. We asked CEO Guthrie to explain why she believes regulation is both essential and inevitable for this burgeoning market segment.

THE FINTECH MAGAZINE: Do we really need regulation for BNPL when people are using it to pay for relatively small-ticket items?
Fiona Guthrie: Yes. Payday loans also involve relatively small amounts of money, at high cost, over the short term, and there are similarities to BNPL. For people on low incomes, who are finding it tough, £10, £100 or a couple of hundred dollars might as well be a million, so the industry needs to ensure these products are being sold safely and fairly. And, while BNPL might be used for small amounts in the UK, in Australia you can get it from a couple of hundred dollars up to about $30,000. It’s a big regulatory loophole, which trucks are being driven through around the world. Credit is a complex product that can be harmful if not used carefully, and when it does harm people, that harm is really serious.

We’ve got regulatory arbitrage happening now between mainstream credit products and this ‘new’ credit facility, BNPL – which is not new at all, really, it’s just another way of getting people into debt. Debates about it are being held around the world and, in my view, it’s not a matter of if BNPL is regulated, it is just a matter of when and how. My message to industry players is to start shaping that now, so that they end up with adequate regulation, rather than having it done to them.

TFM: Isn’t there an element of self-regulation, though, given these firms’ business models are based on ensuring people pay the money back?
FG: If you took that argument to its logical conclusion, you’d start to wonder why we have credit regulation at all. However, the reason we do have regulation for other forms of credit, and need it for BNPL, is that there is a difference between credit risk and affordability. We’re seeing people with multiple BNPL debts and multiple accounts, who are loaded up with credit.

It is in the interests of lenders to lend as much as possible, because people will do whatever they can to repay their debts. However, as financial counsellors, we work with people who are experiencing financial hardship, and we are seeing more and more people who are being harmed by these products. If they don’t have enough money for their living expenses and are given credit they can’t really afford, they will do what they can to repay that – but it’s bad for them, bad for their families and communities. In the end, that’s what’s going to undo the BNPL industry. Providers will rue the day they tried to argue that they can self-regulate. They’d be better off biting the bullet and creating a level playing field now.

TFM: OK, so how can regulation be achieved in a way that doesn’t stifle the innovation that characterises BNPL?
FG: I have worked in consumer advocacy around financial hardship for about 35 years, and I have always been told regulation will stifle innovation. Yet I have yet to see any evidence of it. The findings of the UK Financial Conduct Authority’s Woolard Review into the unsecured credit market, means that the UK is going down the regulatory path. In Australia, we have a self-regulatory code, which is better than nothing, but not the same. If BNPL providers really don’t want to lend to anyone who can’t repay, then the regulation we’re talking about should be basic common sense, with simple affordability checks, and the ability to innovate within that. Regulation doesn’t have to be incredibly prescriptive, either. Responsible lending laws in Australia, for example, require lenders to check a loan can be repaid.

Now, one would hope and think that they would be doing that, but we know some lenders haven’t, so we’ve had to introduce more prescriptive legislation around payday lenders, for example, just as the UK has, because some business models are based on loading people up with so much debt that it’s actually very profitable. They create a lovely little cycle where there is lots of profitable debt and people will pay as much as they can, but it won’t work for people who are on the debt treadmill, as I call it. The debts get sold off to the debt collector and off they go again. At the moment, because BNPL sits outside of the credit regulatory framework, it’s actually distorting the marketplace because there’s no record of people’s payment history or any defaults. It’s all about the providers. But we’re all in a community. BNPL is part of a bigger picture.

What COVID should’ve taught us is that what we do in business, what we do in the community and what we do in government has to benefit all of us, and, if it’s not, there’s something fundamentally wrong. What I hear from the BNPL industry is all about helping merchants to make people buy more and get them into more debt. To me, it’s all about sales and marketing and we don’t put the consumer, the person, at the centre. That’s what’s so disappointing, because it’s not actually being honest about what the product is doing.

BNPL is a payment mechanism that many people have embraced, and one that can be really helpful. But it can also be harmful. When someone’s buying something on credit, things can go wrong and we just need to make sure the same rules are applied to all types of products. Regulation can actually unlock innovation because everyone knows what they’re dealing with and is competing within the same rules.

TFM: Is the regulator in danger of waiting until people are defaulting left, right, and centre, before acting?
FG: Research by our Australian regulator showed that one in five people is missing payments, one in five is cutting back on essential items to make those payments, and about 20 per cent are using their credit cards to pay their BNPL debts. The UK’s Woolard Review had similar findings: people taking out payday loans to pay their BNPL debts. And we are seeing more and more debt advice clients with BNPL. The industry’s done a great job – people are not realising it’s debt. And the reason some of the hardship numbers have been lower than you would expect is because people prioritise those payments over other things.

However, over the next couple of years, we’ll see the same thing happening here as happened to credit cards, which we could’ve had this same debate about 40 years ago, when they were the new, shiny things. People loved them, thinking they were so exciting because they thought they enabled them to manage their money. But credit cards are now seen, particularly by the younger generation, as something that got their parents into trouble. For the next generation, it will be BNPL.

This article was published in The Fintech Magazine #21, Page 75-76