BNPL is growing big
The BNPL sector has grown dramatically. ASIC reports that the total value of all BNPL transactions increased by 79% in the 2018-19 financial year, which continues into 2020 with a 43% annual growth.
Seeing the growth of this sector, the biggest bank in Australia, CBA recently announced its own BNPL service. CBA joining the game is likely to help further grow the industry.
Intense competition in the industry is good news for consumers, who can benefit from better deals and a larger variety of choices.
Nevertheless, a larger variety of choices and using multiple BNPL services also come with hidden costs.
Hidden risks
ASIC finds that 55% of consumers have used at least two different BNPL arrangements. Consumers may want to use multiple BNPL providers to increase their debt capacity. But doing this could be dangerous.
BNPL services are debts on top of credit cards, home mortgages, car loans etc. The more BNPL services consumers sign up to, the more debts they are adding to their portfolio. This increases their likelihood to lose control in debt management.
When individuals take out loans and mortgages, their borrowing capacity is assessed against their credit history. But an individual borrowing limit with BNPL services is not as tightly linked to credit history.
Therefore, individual consumers can easily succumb to over-commitment. Having multiple BNPL services can increase overall financial commitment.
Some BNPL providers claim that they do not charge interests. But there is never free lunch!
Installments are interest-free but late payments attract fees. According to ASIC’s report on BNPL industry in Nov 2020, in the recent 12 months, 21% of consumers missed payments.
Individuals may also tend to over-spend with multiple BNPL services. The convenience and availability of multiple BNPL providers tend to lure consumers to buy things they would not have usually purchased.
It is not easy to multi-task. The more BNPL services individuals use, the harder it is for them to keep track of spending and repayments.
Individuals may even forget that they have a payment due when they sign up to too many providers!
It is important to read the terms and conditions carefully. Different BNPL providers have their own jargon for account fees, payment schedules, refund policies, and late payment fees, etc.
If individuals sign up to a wide range of BNPL providers, they could be easily confused by their differences and costs could be incurred.
Individuals may think that they have until next week to pay to avoid a fee from provider A, but it may turn out that they are still charged because they have confused themselves with the T&C of provider B!
The moral of the story, apply caution when using BNPL services!
Angel Zhong - School of Economics, Finance and Marketing, College of Business and Law
