Buy Now Pay Later Policy Recommendations

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1 Buy Now Pay Later Policy Recommendations JANUARY 2019

2 Executive Summary A powerful tool for consumers Buy Now Pay Later (BNPL) products are an emerging alternative form of credit, and a powerful tool for consumers to take control of their finances. Compared to the outdated credit card model, these products provide a better alternative with simpler product constructs, interest free terms, lower fees and typically lower credit limits. Credit card outstanding balances total more than $51 billion, nearly $32 billion of current balances are accruing interest1 As ASIC recently reported, almost 2 million consumers were struggling with their credit card debt (that is more than 1 in 6)2, representing a real cost to society. Using BNPL products as a budgeting tool and an alternative to a high-cost credit card drives positive consumer outcomes and gives customers a real alternative when they decide how to pay for goods and services both online and instore. The diversity of BNPL providers, products and revenue models supports the need for reforms that establish consistent and comprehensive standards, in particular where there is the potential for consumer detriment. While more forward-thinking players have taken to selfimposed checks and risk management practices to safeguard themselves and consumers alike, the industry bears the responsibility to lift standards and ensure a minimum level of protections are afforded to all consumers. With over two million consumers embracing BNPL products over the past 12 months, it is imperative that new regulations ensure an appropriate level of due diligence is conducted at the time of application, and should a consumer face difficultly in meeting their repayment obligations, that they enjoy the same protections that exist for all regulated credit products. Over 2 million consumers used a BNPL product during the financial year. This represents about 10% of the adult population in Australia. ASIC report 600: Review of buy now pay later arrangements Total Value of Credit and Charge Card balances accruing interest as of December 2018 (Credit and Charge Card Statistics - Reserve Bank of Australia) 2 - ASIC review of the credit card market (

3 New regulations should be fit for purpose and tailored for the BNPL sector to ensure these products remain a viable alternative payment, as well as, foster continued innovation within the industry. Regardless of BNPL product design, a scaled down regulatory regime should apply for products that are both below a specifically defined credit limit and which cap consumer fees. It is in the interest of both the regulators and industry participants to reach an agreement which encourages innovation that drives positive consumer outcomes while ensuring an appropriate level of consumer protections are in place. BNPL products are valuable to consumers and society and present a financially responsible alternative to a credit card. As evidenced by their widespread and recurring usage, consumers appreciate the additional control and limited fees these products provide. The proposed regulatory principles focus on ensuring: a minimum level of upfront consumer due diligence is conducted; consumers can comfortably afford their repayment obligations without financial hardship; consumers clearly understand the products they are signing up for; and More than four in five consumers (86%) who had used a buy now pay later arrangement within the last 12 months plan to do so again. ASIC report 600: Review of buy now pay later arrangements adequate processes and controls are in place to help consumers manage their situation should their financial circumstances change. These recommendations take into consideration an individual's responsibility and strike a balance between an overburdensome regulatory regime and the need to protect consumers. 2

4 About Zip Zip Co Limited (Zip) is an ASX-listed provider of payments and digital retail finance products to Australians in a range of industries including health, education, retail and travel. Founded in Australia in 2013, the business and its 180-person team are all based locally and managed by a team with over 60 years of credit experience. Zip is a licenced and regulated credit provider and a member of the external dispute resolution scheme, the Australian Financial Complaints Authority (AFCA). Zip was conceived in the belief that there was an opportunity to provide customers with a better and fairer alternative to the unfriendly credit card model and broken traditional sales finance approach. These products have lengthy applications, are complex and hard to understand, often have hidden and unfriendly terms, and are typically reliant on customers revolving high balances and interest. Offering simple, transparent and consumerfriendly credit and payment products via a closed loop payments network, Zip is available at more than 12,000 retail locations across Australia. These retail partners choose to offer Zip to enhance their customer payment experience, attract new customers, increase conversions and grow revenues. For these benefits merchants typically pay a merchant service fee higher than a credit card, enabling Zip to offer interest-free, fairer and better terms to consumers. Zip offers two credit products in the Australian market: Zip Pay is a BNPL arrangement that allows consumers to buy and receive goods or services and then pay for that purchase over time. This product offers consumers a line of credit of up to $1,000 without any interest. The only cost to a consumer is a $6 monthly account fee which is waived if there is no balance owing 3. This product falls outside of the National Credit Code (NCC) regulations. Zip is currently operating at a high standard and set a leading example... Zip Money a fully regulated line of credit with account limits from $1,000 to $30,000 that offers Interest free terms on every transaction ranging from 3-48 months, with the majority being 6-12 months. More than 45% of customers using the Zip Money product are homeowners and home buyers. Aligning with Zip s core ethos of financial wellness, Zip acquired Pocketbook, the market-leading appbased provider of free personal financial management solutions, in Pocketbook, which has over 500,000 users, is a free app which gives consumers a unified view of their finances, access to market-leading budgeting tools, and empowers them to make informed financial, spending and saving decisions. In 2018, Pocketbook tracked over 500 million transactions, totalling approximately $200 billion of spending, giving Australian consumers useful and actionable insights into their spending and saving behaviour. The app also provided over 3 million alerts, which have helped Australians save millions in late bill payment fees, unpaid salaries and bank fees. With more than 1.5 million customers across the Zip Co business, over a billion dollars of transaction volume processed on the Zip platform since inception and the overwhelming uptake and usage of the free Pocketbook offering, it is evident customers recognise the core benefits of Zip s unique product offerings A $5 late payment fee is charged once for accounts that are more than 21 days past due and only after multiple customer communications.

5 Key Policy Recomendations Recomendation #1 Recomendation #2 Recomendation #3 Recomendation #4 Recomendation #5 Recomendation #6 Recomendation #7 Recomendation #8 Recomendation #9 All BNPL credit providers should verify the income of their consumers and ensure their minimum repayment commitments with that BNPL provider do not account for more than 10% of their post-tax monthly income at time of application. All BNPL credit providers should perform credit checks on new applicants. All scheduled BNPL contract repayments should be made from a bank account (e.g. direct debit, debit card or direct transfer) and not from a credit card. All BNPL credit providers should have hardship policies in place that are readily available and be members of an approved external dispute resolution scheme. All BNPL product late fees should be capped at the lesser of $10 per month or 10% of the aggregate monthly repayment due (not the account balance). All BNPL products should have a standardised key fact sheet detailing the core product features readily available at the time of sign-up. All BNPL providers should ensure that customers entering into a BNPL arrangement read the full contract and provide affirmative consent that they have read the agreement and understand the terms of the contract. All BNPL product providers should hold an ASIC credit licence. All BNPL products that offer purchasing capacity of over $2,000 should be fully regulated under the NCC. 4

6 Regulatory Principles BNPL providers must recognise the responsibility that comes with issuing credit, the importance of ensuring products are appropriate to a consumer s circumstances and that safeguards are in place should a consumer s financial situation change. The National Consumer Credit Protection Act 2009 (NCCP) crystalised the legal concept of 'responsible lending' which applies to credit or credit limit increases. Large parts of the regulatory framework are directed at ensuring that credit products and credit providers meet minimum standards across a broad spectrum of products. Credit providers are required to make reasonable inquiries about a consumer s financial position, which are scalable based on the nature and complexity of the credit product. As part of these responsible lending obligations, credit providers must also take reasonable steps to verify the information provided by the consumer. The reasonable steps required to verify information are also scalable in nature. Subsequently, additional regulations directed to specific types of credit arrangements have been passed to meet a category s particular needs and provide the appropriate level of consumer protections. For example: Credit card products have been treated differently to other consumer credit contracts (e.g. home loans or personal loans) in consumer protection laws. The National Consumer Credit Protection Amendment (Home Loans and Credit Cards) Bill 2011 restricted unsolicited offers for credit limit increases, stipulated how repayments are allocated and limited the excess credit (above the limit) available on credit cards. In March 2018 the Australian Government passed the Treasury Laws Amendment (Banking Measures No. 1) Act The Act placed further requirements on credit cards including; how suitability of a credit card contract is assessed based on the consumer s ability to repay the credit limit within a specific period; prohibited providers from making unsolicited credit limit offers and enabled consumers to reduce credit card limits or terminate credit card contracts, including by online means. The Consumer Credit Legislation Amendment (Enhancements) Act 2012 introduced a range of sector-specific requirements, including a cap on fees, for Small Amount Credit Contracts (SACCs). To date, additional segment specific regulations have generally been in addition to the fundamental NCCP requirements. However, the concept of creating legislation specifically tailored to a sector has been firmly established. Sector-specific regulations avoid blanket and prescriptive regulations that are burdensome, affect all products and limit innovations that drive positive consumer outcomes. Customers are adopting BNPL solutions and appreciate the value they provide as an alternative to a credit card. As reported by ASIC, credit card products profit from a large proportion of their customers revolving debt with interest rates as high as 23%. 4 ASIC s investigation found that balance transfers, allocation of repayments and over-limit spending all encourage revolving debt. Supporting this finding, RBA data shows $31.5 billion in credit and charge card balances were accruing interest as of Oct MR ASIC s review of credit cards reveals more than one in six consumers struggling with credit card debt

7 BNPL products that present an alternative to the credit card should be encouraged as the lack of interest, transparent fee structures and short-term nature discourage revolving high cost debt. BNPL products also enhance competition and lead to better consumer outcomes. Although the BNPL industry is not new, the development of new products and introduction into new retail categories has spurred immense growth. The products are fundamentally different to conventional forms of credit, and a sectorspecific approach is appropriate. A number of the BNPL products features (assuming the recommendations in the policy proposed below are implemented) justify a sector-specific regulatory framework: BNPL products are intended to be short-term in nature and positively encourage a quick repayment period; BNPL products have lower dollar credit limits; Costs to consumers are limited; and BNPL product constructs are simple and make it easy to understand the costs of the service. Current BNPL products fall outside the definition of credit within the National Credit Code, and as such, there is a lack of clarity as to the rules governing these increasingly popular alternative payment methods. Whether through the Product Intervention Powers 5 or a new legislative instrument, Zip believes there should be a minimum standard that all players within the sector adhere to. There also needs to be clarity as to the consequences should participants not meet these requirements. It is essential to keep in mind that regulations should not stifle innovation, and innovators, when they achieve scale, must be ready to work with regulators to ensure the right level of consumer protections are in place. BNPL products are shifting the behaviour of millions of Australian customers and fundamentally challenging the traditional ways of paying both online and in physical stores. Regulations are typically backward looking, as behaviours shift, and as customers adopt new offerings, it takes some time for the regulators to understand the shift and then put any new regulations in place. Innovators must work with regulators, educate them on the changes abreast and help define new policies that balance fostering continued growth and innovation vs. overly burdensome regulatory provisions. By working with regulators, BNPL providers can influence the regulatory outcome, and ultimately ensure a positive outcome for all players. The recommendations below present Zip s views on the standards and regulations the industry should adopt Suitability The ability for customers to receive goods or services today and pay for them in the future is by definition credit. While BNPL products are in many ways an improvement on the traditional layby model which has been a part of retail for many years, the core difference is that consumers receive goods or services before paying for them. This distinction is significant, and as a deferred payment arrangement, there is an expectation that a customer will honour the arrangement, and in doing so they will not face financial difficulty. While the BNPL sector and the products offered are diverse in nature, as found by ASIC s recent review, 6 regardless of loan size, product structure or intended use, they are all credit and there should be a minimum standard of due diligence to confirm suitability to which all players adhere. All BNPL providers have a responsibility to take reasonable steps to verify a consumer s circumstance to ensure that an extension of credit is appropriate given a consumer s specific financial situation

8 With historically high household debt, cost of living increases and little wage growth, it is critical that BNPL arrangements do not cause increased household stress, in particular for consumers that may already struggle to make ends meet. While the dollar amounts of specific BNPL arrangements tend to be low, for a customer balancing multiple repayment obligations and struggling to meet current commitments, BNPL debt could be the tipping point. A maximum repayment obligation of 10% of a consumer s monthly net income would ensure that customers are not struggling to meet their repayments. A bright line income check will be simple for the industry to implement and consumers to understand. For example, if a consumer takes out multiple arrangements from a single provider, the total monthly repayments for that consumer over the month should be considered when calculating the repayment versus income threshold and the total required repayments, including any fees, should not exceed 10% of the consumers monthly income. BNPL products when used appropriately as a budgeting tool or as an alternative to a costly credit card should be readily available as they drive positive customer outcomes. An income verification requirement provides the right balance for BNPL providers, regulators, retailers and consumers. Finally, ASIC s customer research suggested that many BNPL customers believed that their BNPL provider already conducted various checks, thus introducing the requirement to verify income, which several players are already doing, is a minimum standard that all providers should adopt. 7 Policy Recommendation #1: All BNPL providers should verify the income of their consumers and ensure the minimum repayments with that BNPL provider do not account for more than 10% of a consumer s post tax monthly income at time of application. As a form of credit, the use of readily accessible credit information to understand a consumer s financial situation and history of meeting repayments is paramount. Participation in the credit reporting regime will enable all credit providers (including BNPL participants) to better establish a consumer s creditworthiness, decrease levels of over-indebtedness, lower credit default rates and ultimately lead to a more competitive and efficient credit market. Furthermore, other lenders have reasonably already started reviewing outstanding BNPL arrangements as part of their broader investigation into a consumer s financial circumstances. Banks are scrutinising income and expenses because of the subpar responsible lending practices exposed by the Banking Royal Commission. Although banks are taking different approaches to how BNPL solutions impact their lending decisions, they are taking a closer look at these arrangements. For example, the below is a recent Australian Financial Review quote from a Westpac spokesperson. Our customers have different lifestyles and habits, so we inquire about income and expenses on a case-by-case basis as part of our responsible lending obligations. Afterpay expenses represent a liability which would need to be understood as part of our broader inquiries regarding income and ongoing expenses." 8 Credit checking will assist the financial verification process, ensure the products are not being abused by customers that might already be struggling with debt (e.g. multiple Small Amount Credit Contract enquiries) and assist other lenders in their assessment of a consumer financial situation. 9 Importantly, as the market moves towards Comprehensive Credit Reporting (CCR), the positive repayment history of BNPL arrangements Via a credit check with credit reporting agency as defined in Part IIIA of the Privacy Act (Credit Reporting)

9 will benefit consumers that are building a credit profile or have struggled with debt in the past. Policy Recommendation #2: All BNPL credit providers should perform credit checks on new applicants. The combination of income verification and a credit check should prevent consumers that have limited income and substantial existing debt from inappropriately using these products. Overindebtedness A primary use case of BNPL products, as confirmed in ASIC s recent consumer research, is as a budgeting tool. 10 With minimum fees, simple constructs, low balances and quick repayment periods a core benefit of BNPL solutions is that they do not lead to overcommitment, in particular, when the other alternative is a high-cost credit card. However, when BNPL arrangements are repaid with a credit card, the combination can get consumers into trouble and ultimately lead to overcommitment. It has already been demonstrated with credit cards and balance transfers that paying credit with credit drives poor customer outcomes. Policy Recommendation #3: All scheduled BNPL contract repayments should be made from a bank account (e.g. direct debit, debit card or direct transfer) and not from a credit card. Flexibility Life is unpredictable, and events will inevitably occur that will make it difficult for some consumers to meet their minimum contractual BNPL repayments. As a credit commitment, consumers should be afforded all the protections that come with a credit product, without a distinction between the type of product. Traditional credit providers are required to have hardship provisions and join an approved External Dispute Resolution Scheme, so too should the same obligations apply to BNPL providers. The availability of the program should be communicated to customers, in particular, after missing multiple repayment obligations or where consumers appear to be struggling to make their contractual repayments. Customers should be made aware of the availability of hardship provisions, the ability to seek a contract variation on the grounds of financial hardship and the availability of other financial assistance such as financial counsellors. Customers should have access to both internal dispute resolution (IDR) procedures and an ASIC-approved external dispute resolution (EDR) scheme. Policy Recommendation #4: All BNPL credit providers should have hardship policies in place that are readily available and be members of an approved external dispute resolution scheme. Late Fees ASIC s review of six BNPL providers found that three out of the six participants earned more than 10% of their revenue from late fees, and for one player, this was as high as 24.4%. 11 At these levels, late fees form a core part of the providers business model, are exploitative in their pricing and cause unnecessary and significant consumer harm. A contributing factor to the significant number of late fees charged is that for some providers, late fees accrue on a transactional, rather than at an account level. Consumers could have multiple open transactions; thus, numerous concurrent repayment obligations and late fees can be charged for each missed repayment. Some providers also charge one late fee for a missed payment and an additional late fee seven days after the payment is due if the payment remains unpaid. The structure of these products, namely multiple concurrent arrangements with multiple payment schedules coupled with further penalties for missing payments, has led to significant and unexpected consumer charges. Anecdotal Ibid

10 evidence shows these late fees are also leading to increasing financial stress and an increased number of personal bankruptcies. 12 Furthermore, the reliance on late fees for business sustainability where products are advertised as free masks the actual costs of credit, which is substantial when for some providers nearly 1 out of every 4 customers is charged a late fee in a given month. 13 If a customer has more than one BNPL arrangement with the same provider, that provider should assess late fees on a customer level, and not based on a specific transaction or repayment. If a customer has difficulty making a repayment and another one falls due several days later, it s unlikely the customer would have had time to remedy their situation or receive another payroll payment in the interim. Although customers may be aware of these potential fees upon initiation of the arrangement, should they miss a repayment, the accumulated late fees can lead to significant and unexpected costs. These costs can ultimately become a substantial percentage of the original purchase price. It s precisely these customers that are at risk of financial hardship that may find it difficult to balance multiple payment obligations and numerous late fees from the same BNPL provider. The simplest and most effective means of controlling late fees is a monthly cap regardless of the outstanding balance, original purchase amount or number of missed repayments within that month. Furthermore, late fees should be capped as a percentage of the monthly repayment due and not the account balance, otherwise these fees could be seen as a proxy replacement for interest. Late fees should compensate the provider for commercial costs from late repayments (such as regulatory capital costs and collection costs) and not be out of proportion to the transaction amount, exorbitant or unconscionable. Late fees that are disproportionate to a repayment amount and accrue quickly within a specific month are causing unnecessary consumer harm and must be addressed. Policy Recommendation #5: All BNPL product late fees should be capped at the lesser of $10 per month or 10% of the aggregate monthly repayment due (not the account balance) Transparency Regardless of product construct, consumers should be well informed of the details of the product they are signing up for. Although BNPL products are typically offered via retail partners and offer a streamlined application, there is no reason consumers should not have the required information readily available to make an informed decision. Standard and specific disclosure requirements would ensure that customers understand a product s details and make it easy to compare between payment offerings. Credit cards are required to provide a key product fact sheet in a format prescribed by the National Credit Regulations. The fact sheet contains information about: a. the minimum credit amount; b. minimum repayments (or how those repayments will be calculated); c. the interest rate that applies to purchases, cash advances, promotional period and balance transfers; d. the length of any interest-free period; and e. any annual and late payment fees. The Explanatory Memorandum to the Home Loans and Credit Cards Act states that the intention of the Key Facts Sheet is to: a. provide the consumer with essential information in an accessible form to help them in deciding whether to enter into a credit card contract with the credit provider; b. allow consumers to compare different Senate Inquiry submission number 13 by Personal Insolvency Professionals Association (PIPA) Figure 10

11 credit cards more easily by providing information in a standardised form; c. enable consumers to have a better understanding of how to use their credit cards more efficiently to minimise the amount they pay in fees and interest; and d. help consumers more easily adapt their behaviour to minimise costs or move to another card more suited to their spending habits. Fact sheets are not accessed by all credit card applicants, however for those customers looking for additional details they have been proven to be a useful tool. Although BNPL solutions are diverse in nature, a standardised form similar to a key fact sheet that is easily and readily accessible to customers early in the sign-up process will assist consumers when deciding which payment option is best suited to their needs. The objective being to improve in the transparency of cost impacts and to provide consumers with accurate and reliable information at the point of decision making. Policy Recommendation #6: All BNPL products should have a standardised key fact sheet detailing the core product features readily available at the time of sign-up. In addition to a readily accessible key fact sheet, it is important for customers to read the full agreement they are entering into, and after doing so, acknowledge that they have read and understood the terms of the agreement. There is a level of individual responsibility upon the consumer to understand the terms and conditions they are accepting. Unfortunately, some products (not necessarily limited to the BNPL segment) create long and burdensome contracts that very few customers can fully appreciate Policy Recommendation #7: All BNPL providers should ensure that customers entering into a BNPL arrangement read the full contract and provide affirmative consent that they have read the agreement and understand the terms of the contract. Licencing The six entities included in ASIC s recent review of the segment all hold a credit licence although new players that enter the market are not required to do so. Credit Licensees have general conduct obligations including: acting efficiently, honestly and fairly; being competent to engage in credit activities; having appropriate dispute resolution systems (including both internal systems and being a member of an external dispute resolution scheme); having appropriate and accessible hardship programs in place including set time frames in which to respond to a hardship notice from a consumer; having appropriate compensation arrangements in place (which for some will include holding professional indemnity insurance); having adequate resources (including financial, technological and human resources) and risk management systems; and having appropriate arrangements and systems to ensure compliance. Policy Recommendation #8: All BNPL product providers should hold an ASIC credit licence. Credit licencing provides ASIC with an early view into a new provider entering the market. It ensures a baseline level of compliance, experience and systems are in place and will provide consumers with additional security. 10

12 Credit Limits There are several credit products in the market that are exempt from the NCC although they offer large credit limits and represent a relative longterm credit commitment. Regardless of product construct or fees, products that provide credit limits above $2,000 should be subject to full responsible lending and other NCC requirements.. Policy Recommendation #9: All BNPL products that offer purchasing capacity of over $2,000 should be fully regulated under the NCC. 11