The Importance of Visibility in Safeguarding Australia’s Buy Now, Pay Later Industry
By Tim Poskitt, Country Manager ANZ at Envestnet® | Yodlee®
Australians have for decades had the ability to defer payment and retailers have long been offering deferred payment models to consumers. In recent years, however, modern types of electronic instalment payment arrangements – known as ‘buy now, pay later’ (BNPL) services – have become increasingly prevalent and their popularity has grown exponentially. So much so that Research and Market’s Q4 2021 BNPL Survey revealed that BNPL payments in Australia are expected to grow by 72.1% on annual basis, to reach AUD$18.2 billion by the end of 2022.
The opportunities presented by the BNPL model, however, do not come free of risk. The expanding adoption of BNPL services in Australia has added to the levels of private debt that Australian consumers carry. Managed responsibly, this isn’t an issue – but with widespread proliferation there’s often the risk of unforeseen consequences or innovation outpacing legislation.
In the lead up to the Christmas period last year, financial counselors warned consumers against the risks of overborrowing. According to its annual survey, Financial Counselling Australia (FCA) has found Eighty-four percent of financial counsellors said that about half, most or all clients had BNPL debt at the time of the survey, a stark comparison to the 31 percent reported just a year ago. Moreover, 61 percent of those surveyed said most or all clients with BNPL debt were struggling to pay other living expenses.
Visibility is the key to responsible lending
The BNPL model has the potential to greatly enhance the financial wellness of Australians but only if done so responsibly. In rare cases, BNPL can lead to poor financial decision making but this can be overcome by introducing more visibility in the sector and addressing the risks associated with BNPL lending. Late last year, Jason Wassell, chief executive of the Consumer Credit Trade Association, which represents short-term and small amounts lenders, called for increased visibility. He notes “we need increased visibility of this form of borrowing on credit records. BNPL use is currently invisible and means other lenders are making decisions without seeing the whole picture.”
Bolstering visibility in the sector and reducing consumer vulnerability can be achieved by having access to accurate, real-time bank transactional data. Traditional credit checks, whether ‘hard’ or ‘soft’, provide a level of insight some lenders not currently have available to them. However, these traditional credit checks are often expensive, cumbersome, and only provide insights into an applicant’s basic financial history. Thus, the utility of using such checks to measure an applicant’s current financial health is limited.
Data aggregation and Open Banking pave the way for better lending decisions
Fortunately, the technology necessary to overcome these weaknesses is available. Data aggregators and open banking services can provide a complete, accurate and real-time financial picture of the borrower, with their permission, in a quick and cost-effective manner. These technologies give BNPL providers immediate access to borrowers’ real time financial positions, allowing the provider to make better, more educated lending decisions and protect the consumer from unnecessary risk.
Sophisticated data aggregation technology can augment comprehensive credit reports in both machine readable and human readable formats, for speedy and accurate decision making. The data can augment credit reports to help identify key credit risks and other lifestyle factors, such as whether applicants have children, regularly eat out, pay their bills on time, pay large amounts of interest on their credit card, or whether they have other BNPL facilities to account for.
The BNPL model has seen explosive success across Australia and the potential benefit it offers for Australian consumers’ financial wellness is evident. The key to ensuring the longevity of this industry is to safeguard it, and the technology is already there to help in that process. Sure, legislation will need to be developed to further protect the consumer but using data aggregation and open banking to make more educated lending decisions is a solution that can be made now.
