BNPL now a common financial tangle for clients of financial mentors, who feel regulation is required to avoid 'bottom of the cliff' scenarios

Financial mentors are concerned increasing numbers of their clients are in such a tight spot they are purchasing food using buy now, pay later (BNPL) just to get through the day.

Jake Lilley, senior policy advisor at FinCap said that once people get several BNPL loans under their belt, they can easily find themselves in a debt spiral.

FinCap is a non-government advocacy organisation supporting the work of 200 free financial mentoring services.

"It's lending like any other and we want to see it regulated.

"It’s a massive step to come forward and say 'I’m having problems with money'. There’s been a lot of stigma in society, it’s great that people are reaching out," said Lilley.

BNPL services allow consumers to purchase and obtain goods and services in-store or online immediately, but pay through installments over time. While there are no interest charges, there are penalty fees for late payments. There are not currently consumer protection measures covering BNPL services.

However, a government consultation paper issued in November looking at the the triggers of financial hardship caused by BNPL sector, floats three possible options to address them including applying the Credit Contracts and Consumer Finance Act (CCCFA) to BNPL service providers.

Nicola Eccleton, manager for social inclusion at Good Shepherd, says many clients wait until they are truly sunk before asking for help, and part of this is to do with shame. Good Shepherd is an organisation providing no and low interest loans, usually for larger essential items, as well as debt solution loans for those in financial strife.

"I would love it if people didn’t feel ashamed to ask for help.

"They're trying to navigate the space against the odds, with lots of responsibility, little income, English as a second language and still have stigma about pride and shame," she said.

For many it was a means of financially treading water and BNPL payments were now appearing in the vast majority of the financial tangles Good Shepherd deals with.

"People are independent, proud and want to solve their own problems. The click of a button and $10 a week lets them cope a bit longer.

"There's no affordability assessment, it's so accessible and so quick and it does need to be regulated because it is a form of credit.

"When people are not doing well financially and just managing week to week, their ability to think or plan long term is not really there - they're too busy surviving," said Eccleton.

She said some people see an item of clothing they like and put it on BNPL without a second thought while others, who are usually struggling a bit more, use BNPL to buy something essential, like school shoes, and hope their finances will recover later in the month.

"It's the same reason people use loan sharks: 'I think I'll worry about it next week'," she said.

Some clients preferred staggered payments as a tool for planning ahead and used BNPL to their advantage while others used lower stakes options, like supermarket Christmas clubs, as those didn't take a cut, she said.

BNPL is increasingly accessible, in both retail stores and online, and is being offered as though it is not credit because it does not incur interest.

The perception that most people, particularly home owners who saw capital gains, were 'fine' through Covid concerned Eccleton who said that those who were struggling had been forgotten about. 

In particular this was Māori and Pasifika women, she said, as they were frequently employed in Covid buffeted industries like tourism and hospitality.

Lilley pointed to pressure on customers from commission-hungry sales people and the alarming BNPL arrangements borrowers ended up in, which were outlined in FinCap's submission to the Ministry of Business, Innovation & Employment on the potential regulation of BNPL. 

Mobile phone deals were particularly troubling, with some customers seeking phone repairs being talked into a new phone and a new BNPL arrangement to go with it, before the first one was even paid off.

"We hear from financial mentors of these deferred payment arrangements continuing to be paid before kai is purchased even when the phone is long broken and a whānau has been signed up for an additional ‘plan'," said the FinCap submission.

The contracts are hard to follow too, Lilley said, and often required clicking through multiple web pages to gain a full understanding of the terms.

Alarmingly, he saw one contract that allowed the lender full discretion to charge whatever rate of default fees they chose, rather than itemising them.

Lilley said the pattern of debt accumulation is different for every whanau who receives assistance. Typically a financial mentor will work with them to negotiate more affordable rates directly with their creditors or organise a low interest loan. 

Summer is a financially chaotic time for many households, as they work through a Bermuda Triangle of personal finance, with December dominated by Christmas and holidays spending, and January bringing back-to school expenses.

As a result, February and March is the peak when these chickens come home to roost and even the first post-holiday power bill can be enough to upset the financial apple cart.

Christians against poverty (CAP) work in partnership with local churches and often meet people in their own homes to provide free debt counselling and help negotiating with their creditors, said Michael Ward, external engagement and social policy advisor.

In recent years CAP has seen clients presenting with BNPL debts tripling year-on-year, and the amount of debt now averages $441 per client.

"We're seeing the pressure that comes from households having yet another bill to juggle and they are delaying the point they reach out for help," said Ward.

Ward has seen a wide range of purchases put on BNPL but said CAP is increasingly concerned about the essential everyday living expenses: particularly food, car repairs, nappies and other household essentials typically consumed every week and being purchased using next weeks money.

He said younger people typically had lower financial capability and were more likely to be habitual over spenders but were often the target market for this type of product.

"The social normalisation of these type of products makes it very difficult to shop instore or go online without seeing this message being pushed," said Ward.

Ward said that an aspect of the regulation of responsible lending was that lenders offer assistance to help people who are falling behind get back on track but BNPL lenders currently fall outside of that obligation.

Mainstream lenders, under the CCCFA, have a responsibility to assess loan affordability for the borrower to ensure they don't fall into financial hardship, but  BNPL lenders have no such obligation.

Good Shepherd NZ, Christians Against Poverty (CAP), FinCap and Sorted by Te Ara Ahunga Ora (The Retirement Commission) along with other providers collaborated on a campaign late last year to promote safe spending during the holiday season and make consumers aware of the help that was available. 

Because BNPL is unregulated it is much easier to obtain credit and those who seek it for hardship situations have usually exhausted all avenues for further credit and it helps them stay on top of the current week.

Often, the following week is no different and as a consequence, more people are falling into default and being charged late fees.

"BNPL providers are earning millions of dollars per year from default fees and late fees," said Ward.

He said FinCap's submission demonstrated articulated the concern that BNPL is a ticking time bomb.

"Many people are on the edge of financial hardship, and despite all the effort advocates and responsible lenders have made to put adequate protections in place, this category falls way outside of that and there's a significant risk that retailers may promote less regulated products in place of more regulated ones.

"While we’re pleased to see innovative credit products, it's a concern when they are detached from the basic consumer protections the law requires for every type of lender.

Ward said BNPL providers have a level of expectation that customers will fall into default and that is a problem because they should not be benefiting from financial hardship.

"Often BNPL is talked about as interest free but it’s certainly not cost free."