As interest rates continue to rise, researchers from the UNSW Business School have suggested that buy now, pay later (BNPL) providers may need to take a look at their current business models.
Associate professor Rob Nicholls, who is an expert in financial services and the regulatory space, explained that the BNPL model originally emerged during a period of very low rates.
“The merchant fees and consumer charges were all designed in that low interest rate environment. So, it is likely that BNPL operators will need to consider whether their existing model will work in an environment of higher interest rates,” he said.
On Tuesday, the Reserve Bank announced its fourth consecutive 50-basis-point hike, taking the cash rate to 2.35 per cent, and economists have predicted that rates could reach as high as 3 per cent by the end of the year as the central bank looks to bring inflation back to target.
“It would not be consistent for the RBA to be looking to control inflation and have the ‘interest rate pain’ being deferred using BNPL. The RBA takes the view that there are enough savings to mean that controlling inflation will not lead to a recession,” said associate professor Nicholls.
“BNPL does not fit well into this approach. It means there is a high likelihood of further regulatory intervention into the BNPL space.”
Assistant Treasurer and Minister for Financial Services, Stephen Jones, confirmed in July that the government was moving ahead with plans to regulate BNPL and to treat it as credit.
“If it walks like a duck and quacks like a duck, it's a duck,” he said.
“So let's have an end to the silly argument about whether BNPL is credit and get on with the next stage of growth for this emerging industry.”
However, UNSW Business School’s Dr Natalie Oh stated that the debate surrounding whether BNPL should be regulated under credit laws and whether BNPL products provide enough consumer protection has continued.
She pointed out that Australians aged 18 to 24 make up 23 per cent of BNPL's customer base, but those aged 15 to 24 have also been found to have the lowest financial literacy rate.
“This fuels the debate on whether there is adequate consumer protection in the BNPL space, especially for young people and those that are financially vulnerable,” said Dr Oh.
“To increase consumer protection around new financial innovations such as BNPL, there needs to be an increased financial literacy rate.”
In response to the higher cost of living, and with real wages continuing to lag inflation, Dr Oh noted that households could be forced to use alternative funding sources like BNPL.
“The 2020 ASIC report suggested that 43 per cent of users with a BNPL arrangement have taken out additional loans to meet their BNPL obligations. This will be the likely trend going forward to keep up with debt payments which means a snowball effect in the personal debt space,” she added.
Jon Bragg is a journalist for Momentum Media's Investor Daily, nestegg and ifa. He enjoys writing about a wide variety of financial topics and issues and exploring the many implications they have on all aspects of life.