Striking a balance between over-indebtedness and convenience

By Ndodzo Mawela &?Gracious Nyoni | Financial Services Strategy

Buy Now Pay Later (BNPL), a type of short-term financing that allows consumers to split purchases into equal, often interest-free payments, is quickly gaining prominence among consumers. BNPL providers are disrupting traditional lending business models such as credit cards by leveraging innovative technology and offering fast and seamless finance to consumers at the point of sale.?

?Currently, interest-free BNPL products in South Africa do not fall under the ambit of the National Credit Act (NCA) as they are technically not considered to be credit. However, if a borrower defaults on the payment, the agreement becomes an incidental credit agreement because both parties did not initially intend to enter into a credit agreement. Despite this, only limited portions of the NCA apply to incidental credit agreements.

This has a number of implications for consumers and providers:

1. ?Providers are not required by law to report consumers’ BNPL obligations to the credit bureaus.?Some, however, choose to use credit bureau information in their decision making. This one-way information-sharing mechanism poses risks of over-indebtedness because providers make credit decisions without knowing if a borrower has BNPL commitments with other BNPL providers.
2. Providers are not required to perform comprehensive affordability assessments on consumers before entering into an interest-free BNPL contract.?Comprehensive affordability assessments typically require the collection of stringent Know-Your-Customer (KYC) documents and information that is used to assess a borrower’s ability and willingness to pay. Collecting and verifying these documents can be costly and time consuming. However, for BNPL consumers the fast approval speeds are an attractive proposition and selling point. This, combined with limited data sharing, not only poses risks to vulnerable consumers who might overextend themselves, but it also poses risks to the providers’ balance sheets because they might inaccurately assess consumers’ affordability.
3. The seamless integration of BNPL into e-commerce websites means that many consumers are often unaware that they have entered into a transaction with a third-party lender.?BNPL is often marketed as a payment method, despite it having many of the same repercussions as a loan in the event of non-payment. Its one-click process also means that buyers often do not have enough time to consider affordability, risks associated with non-payment or compare alternatives. The marketing of some of the products also does not explicitly mention the application of late payment fees and the size thereof.

?As much as regulating the BNPL market will likely add friction to the consumer journey and potentially limit the pool of credit-worthy consumers, it will also serve to protect both providers and consumers from risks of default and over-indebtedness. When regulators finally step in, they will need to strike a balance between regulation that protects?consumers from over-indebtedness?while preserving the flexibility and convenience that consumers have become used to.

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