Why 'the new Lay-By' could be better for you than a high-interest Credit Card - and why it's not just for the kids

The initials BNPL sprout up regularly in newspapers resembling an awkward alphabet soup. It's hard to miss the proliferation of platforms such as AfterPay, Zip Pay, Klarna and others who offer their services in shop windows, websites and other channels.

'Buy Now, Pay Later' is a consumer revolution causing quite a stir. It claims to take the quaint shopping tradition of lay-by into the digital age and has delighted its users, enriched investors and outraged some consumer groups.

Even if the over-50s never use them, given our offspring are most likely customers it pays to appreciate what those four letters BNPL really mean. And although it's not primarily aimed at us, the innovation might yet prove handy to older consumers. 

First, an explanation: As the term BNPL suggests, it allows the consumer to delay paying in full for myriad goods and services but to enjoy the benefit of having them now. Unlike the old-school lay-by you do not pay off in instalments and then collect. You get it in your hot little hand now and then make the regular payments generally with no interest charges.

Should you fall behind with payments there are late fees to pay, but its proponents say the system is built on trust, simplicity and avoiding credit card-style debt traps. With BNPL, the immediacy not only trumps the delayed gratification of lay-by; it also kyboshes the risk of racking up huge bills by ‘putting it on the plastic’ and paying usurious compounding interest rates.

Apart from late fees and sometimes establishment and other charges, the consumer doesn’t pay directly. The merchants, be they selling socks, solar power products or sensuous experiences, reward the BNPL platforms with a cut of the purchase.

It all seems nice and tidy, but some consumer advocates have been too quick to lump it in the same piegonhole as credit cards.

A 2019 survey shows about one-third of those aged 25-34 years and 35-49 have signed up for BNPL platforms. The figure drops to just 12% for those aged 50-64 and only 2% for those aged over 65.

While most purchases for the younger groups are for fashion and beauty products, the system works for any number of goods and services subject to caps on the amount you can spend.

The list perhaps more applicable to FiftyUp members includes dentistry, flights, and most anything from the thousands of stores and online retailers who are signed up (and pay between 3-6% of the price to the platforms).

Whether a credit card, personal loan or BNPL is better for you will, of course depend on how much you intend to spend and how fast you can service the debt. If you're not one who pays off the credit card regularly, for example, you might be better off on interest-free payment schemes.

A Canstar survey last year showed in the contest between credit cards and BNPL more than two-thirds of all Australians see the cards as 'more financially responsible'. But younger consumers are far more positive and aware of the offerings of the services and the potential pitfalls of the cards.

Any BNPL transactions are not regulated under credit laws, which require responsible lending provisions and consumer protections to be observed. And it’s this which has led to some consumer groups crying foul that BNPL operates through a legal loophole and should be required to work within the credit laws.

The operators say their loan limits are lower than credit cards, and they can freeze accounts if payments are late plus there’s a cap on how far late fees can accumulate.

So far, the corporate regulator ASIC and a Senate inquiry have looked into the sector and the strongest recommendation is that it develops a self-regulatory code of conduct.

ASIC did say the arrangements could cause some consumers to find themselves overcommitted and liable to late fees. It also found one in six users had become overdrawn, delayed payments or borrowed extra money because of BNPL commitments.

But the interim Senate report found excessive regulation now could curb innovation in financial services later which might benefit consumers.

For example, if the upside of a growing BNPL sector can offset the downsides of excessive credit card use, surely that would be a good thing?

The latest Reserve Bank of Australia figures show since COVID more than $6 billion which was accruing interest has been wiped off the national credit card debt.

Also more than half a million credit card accounts have been closed since the end of March. The changes brought by the virus have played their part in the move away from credit cards but so has BNPL.

You are going to be hearing a great deal more about BNPL so don’t assume it’s just for younger consumers. It has a loyal, large and growing customer base and the test is going to be if the sector can self-regulate to address the concerns or will face heavier-handed self-regulation.

Any information general advice, it does not take into account your individual circumstances, objectives, financial situation or needs.