After a tough 2021, buy now, pay later is a tempting option. But for low-income New Zealanders, the new form of credit poses big risks.

This content was created in paid partnership with Kiwibank.

Natalie Vincent is worried. As chief executive of the Ngā Tāngata Microfinance Trust, she and the network of financial mentors and loan officers the trust works with regularly encounter low-income New Zealanders in need of financial aid and advice. Now, many of them are turning to a relatively new form of borrowing, and that’s what has Vincent so concerned.

Debts owed to providers of buy now, pay later (BNPL) schemes – the point-of-sale credit products “disrupting” personal finance with their ease of access and carefully pitched marketing – are appearing more frequently in the bank account statements of Ngā Tāngata clients.

“We’re heading into this Christmas period, which should be a joyous time. It’s summertime, people want to have friends and family over and enjoy getting out of lockdown,” says Vincent. “We’re just concerned there’s going to be a lot of marketing … thrown at people that [says] ‘Reward yourself, you’ve had a hard year, look at all these great deals we’ve got!’ All these promotions encourage people to spend.”

It’s this perfect storm of circumstances that has led Ngā Tāngata Microfinance, online independent money adviser Sorted.org.nz and four other organisations in the financial capability sector to team up on a campaign encouraging people to, in Vincent’s words, “Just stop, take a pause. Spend safely before Christmas and if you need some assistance, there’s no wrong door.”

Ngā Tāngata provides low-income whānau with small interest and fee-free loans, along with access to its support network of independent financial mentors who teach skills and give advice to set clients up for the long-term. Kiwibank provides the trust with the loan capital; as people repay the trust, it recycles the money into additional loans that can help more New Zealanders.

Ngā Tāngata has provided around 820 loans – nearly $2 million in total – since it was founded in 2009. Most of its nearly 350 current clients are Māori and Pasifika, female and over 30, with an average debt of $18,000 and no significant assets to their name. Nearly 80% live on a government benefit, some with part-time and casual work supplementing their income.

In its time, Ngā Tāngata Microfinance has come up against payday lenders, loan sharks and retail financiers. BNPL is the latest credit trend to enter the picture. Unlike a more traditional option like lay-by, where people must pay off the full cost of an item before they can take it away, BNPL loans let you have consumer goods or use services immediately, without interest or upfront fees. Online and app-based options mean the barriers to entry are low, while repayments are usually made in equal weekly or fortnightly instalments for one to three months and are linked with a debit or credit card for ease of payment. Late fees of typically $10 are charged for every missed repayment. Providers earn most of their revenue from charging participating retailers a fixed fee or a percentage of the price of the good or service.

For Aotearoa, it’s proven to be a fast-growing niche. The six players who make up the local market serve over half a million New Zealanders, a number that has doubled in the last two years. The product is running red-hot globally too, with massive uptake in Australia, the UK and the US. More traditional players, such as banks and credit card providers, are eyeing up the sector with interest, eager to get in on the action.

But financial mentoring services are worried about this rise in popularity. Vincent points out that the schemes facilitate impulse purchases, which put low-income families more at risk of overspending.

“If you’re on a low income and actually making a purchase that over six weeks is going to cost you $20 a week, have you actually considered [whether] next week you’ll still have $20 available? Or are there other payments coming out of your account that week, which means you may default?”

Earlier this year the trust started asking applicants to disclose the extent of their BNPL indebtedness, having noticed it encroaching more and more on the financial positions of its clients. Just over a third of them had at least one BNPL account, says Vincent.

Three clients had a collective $2,000 owed to BNPL providers, two of which had passed the debts onto debt collectors whom Ngā Tāngata repaid. Vincent says one of the three clients, whose overall debt totalled $14,000, had lost their job because of the Covid-19 lockdown and was now relying on a benefit. They had signed up with three BNPL providers. Another recent applicant had accounts with four providers and was required to make 16 repayments a month. Vincent says it’s hard to keep track of instalments when they start to pile up – and if a payment gets missed, the default fees can soon add up.

New televisions or trips to the dentist aren’t the only kinds of goods and services that BNPL schemes enable – according to Vincent, nearly a quarter of the trust’s clients reported using BNPL to buy groceries, with some commenting in a Ngā Tāngata survey that rising food prices have increased their supermarket bill.

While Vincent doesn’t dispute that BNPL is meeting a broad range of needs, she questions why people are depending on it to purchase essential living items like food. “That’s completely unsatisfactory to thriving in your life if you’re having to do that.”

She acknowledges that BNPL schemes can offer a useful alternative for people whose poor credit histories bar them from accessing more mainstream credit products, but says that their utility and safety depend on people having the financial know-how to judge whether they can repay what is ultimately still a form of debt – contrary to how they are marketed.

Complicating matters is the fact that our laws don’t currently recognise BNPL as a form of credit – the rules requiring credit card and loan providers to look into an applicant’s creditworthiness and ensure they can meet their financial obligations don’t apply to this new kid on the block. While BNPL providers have dedicated teams to help users get back on track with their repayments, how best to address the schemes’ potential to cause financial hardship is something the Ministry of Business, Innovation and Employment is consulting on.

Vincent says the board of Ngā Tāngata recently adopted the position that the industry should be brought within the existing legal framework. Safeguards they would like to be put in place include mandating affordability assessments and stopping customers linking their credit cards to their BNPL accounts, thereby reducing the risk of spiralling debt.

Buy now, pay later is a “clever” credit product, Vincent says – it’s fast, accessible and well-marketed. But where are the alarm bells when a person enters a shoe shop and potentially buys three pairs of shoes using three different buy now, pay later providers? Presently, she says, there are none.

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