Investors will likely remember 2019 as the year when the major banks got the scrutiny and oversight required, amongst other things. Unfortunately, it has probably also resulted in an unnecessary tightening of credit conditions for the Big 4 in certain segments, most notably in SME and auto/consumer lending which has stalled certain parts of the economy.
In consumer credit, an uneven playing field has now developed. While the banks face strict obligations under APRA regulations and the National Consumer Credit Protection Act, the “Buy-Now, Pay-Later” (BNPL) industry is taking advantage of having no such constraints. Notably, a Senate probe into the BNPL industry in February this year did not recommend forcing the providers, such as market leader Afterpay (APT) and challenger Zip Co (Z1P), to conduct responsible lending checks on consumers themselves.
While many are still debating if BNPL is ‘credit’, we are willing to make a bold call and say it is. If a consumer can purchase two bottles of whisky for $1,400 (see below) and pay them off for $10 per week (not including any account keeping or late fees) – presumably for over 3 years – it should be regarded as credit. To further the point, ASIC review’s into the industry late last year noted that 23% of payments to a BNPL provider are made via a credit card1, demonstrating the credit risk originated by the BNPL provider is often transferred to another lender where it can accumulate.
This type of ‘credit’ is growing rapidly: Afterpay and Zip’s combined sales in Australia have grown from virtually nothing in 2016 to just shy of $3bn in transaction value in FY19 (+98.5%y/y)2. They are now being followed by high-profile launches of similar services from Flexigroup and Latitude, along with a swathe of start-up providers. BNPL has grown from a fringe product targeting millennials for small purchases to now being a mainstream form of finance.
The number of complaints from consumers is increasing in unison, with more than 250 complaints lodged to the Australian Financial Complaints Authority (AFCA) in the eight weeks to the end of June3. Without robust regulation around BNPL providers, AFCA is limited in its ability to resolve issues for consumers. These consumers are typically young (60% of them are aged between 18-34), with 44% earning incomes below $40,0001. The review also found that one in six customers had become overdrawn, delayed other bill payments or borrowed money in order to meet payments to BNPL providers.
With the Australian consumer limping along and vulnerable to major economic shocks, it is important that the playing field gets levelled. Credit should be called credit, responsible lending must remain paramount and ‘borrowers’ should be appropriately educated about the decisions they make. As recent history suggests, we are far better off dealing with issues before they become systemic. The same rules should apply to both Fintechs and old-school banks.