Caitlin Fitzsimmons in her Sydney Morning Herald’s article Buy now, pay later: you say innovation, I say gateway to debt highlights some good points related to Buy Now Pay Later and how it has a potential to be an issue later. I put together the infographic above to supplement it with some data and summarize the important issues this brings.

“Buy Now Pay Later” on the Rise

Buy now pay later services are relatively new but have been growing rapidly in Australia. They allow you to buy a product or service and delay payment. Depending on the product or service, you pay off the purchase over a specified period. You don’t need to pay interest; instead, they charge various fees, such as late fees, monthly account-keeping fees, payment processing fees, and establishment fees (only if you don’t pay within specified time). The number of consumers using these services surged from 400,000 to approximately 2 million between 2015 and 2018. One of the reasons for its popularity must be its easiness to use. Unlike credit cards, they do not check your backgrounds strictly prior to approval. In fact, according to the 2018 report from the Australian Securities and Investment Commission, 60% of the users are young, between 18 – 34 years old. 44% of the users have an annual income of less than $40,000, within which 40% are students and part-time workers. It was reported that the services have seen massive growth amid the COVID-19 pandemic.

Why They Are Not Just Another Form of “Put It on My Tab”

If you were a regular customer at a bar, you might have told the bartender, “Put it on my tab” once or twice. Then, you would pay the bill once you had enough money. This “buy now pay later” could only be possible if you had a very close relationship with the bartender, based on trust. Had there not been trust, the bartender wouldn’t have accepted your “Put it on my tab” request; you would have always ordered drinks within your budget.

The problem with buy now pay later services, in my opinion, stems from this point. There is no trust, in other words, the providers don’t check your capability to pay because there is no such regulation for non-interest services. It is easy to over spend when there is no limit. The providers then would charge you additional fees if you couldn’t make the payment on time. The same report found that one in six users had become overdrawn, delayed bill payments and borrowed additional money from family, friends, or another load provider.

A Bubble Forming?

What would this mean at the time of a recession? Today, Australia is officially in a recession. The Australian Bureau of Statistics released data that Australia’s economic activity fell 7.0 per cent in June quarter 2020. The government expects up to 400,000 Australians lose their jobs or have their hours reduced to zero as a result of the restrictions due to COVID-19. It is easy to imagine that more people would turn to buy now pay later services for their fast approval and instalment payments. This may not be good news, however, for an economy suffering from the coronacession, where unsecured debt is given out like this. Are buy now pay later forming a bubble?

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