How Open Banking can shut down BNPL debt traps

Buy Now Pay Later is taking on a whole next-level meaning as almost one quarter of the rising number of Australians using BNPL pay off those debts with their credit cards.

When it comes to Pay Advance (access to wages before they’re paid) the latest research from Q1 2023 shows the average user of these services now spends a whopping $749 per month on repayments and fees. That’s up 60% on the same period last year.

Many of those customers are younger Australians already pummeled by rapidly escalating rents, mortgage rates and other costs of living, the research from Open Banking technology and personal finance app provider Frollo confirms.

More than a third of Gen Z (34%) use BNPL compared to 18% of baby boomers. Credit card use is more popular among baby boomers, with 70% of them using it compared to only 18% of Gen Z.

Behind these and other alarming statistics lies the fact that most BNPL and Pay Advance providers do not perform credit checks or report the debt to credit bureaus. That’s because regulations governing banks – and their credit cards – do not yet cover this younger, booming sector.

Believe it or not BNPL and Pay Advance are not considered credit products, which means providers do not have to do checks on customers’ ability to repay – though some do.

The financial risk for lenders, Frollo warns, is that lack of credit checks and reporting to credit bureaus makes it difficult for other lenders to assess a borrower’s ability to repay, leaving them vulnerable to bad debts.

The reputational challenge for responsible companies in the sector is that they must convince the public that they do undertake checks to minimise the danger of their customers heading into a vortex of debt.

Reducing risks in a huge and growing market

Fuelled by the rise of e-commerce, BNPL take-up is now expected to expand at a compound average growth rate of 10.9% across the next five years, with Gross Merchandise Value totalling about $26 million by 2028.

Simon Docherty, Chief Commercial Officer at Frollo, says that Open Banking offers a way for consumers and lenders to mimimise the significant risks in this rapidly expanding sector.

The Open Banking system enables lenders’ systems to securely “talk to each other” and share consumer information in a regulated way, making thorough loan assessments quicker and easier.

Frollo’s tech in the open data world supports clients including BOQ, Virgin Money, P&N, Beyond Bank, mortgage aggregator Finsure and Suncorp.

“Open Banking provides lenders with a secure and complete financial picture of any potential customer, including payment history with BNPL and Pay Advance providers, as part of the credit application process,” Docherty said.

Protecting consumers from debts they can’t repay

Validation of this is reflected in how the Australian Competition and Consumer Commission, the national consumer law watchdog, sees Open Banking’s value and is now working with major lenders to help it mature while traditional banking regulations play catch-up.

“With regulation underway, lenders must employ the necessary tools and technology to accurately evaluate affordability and risk,” Docherty said.

“Open Banking can play a crucial role in mitigating these risks by providing lenders with a complete financial picture of their potential customers.”

As well as being a pioneer in Open Banking and the Consumer Data Rights (CDR) regime, Frollo also offers a budgeting app for consumers.

Its research has found that most consumers use more than one bank or lender and the Frollo app enables consumers to see all their finance information in one place, making bill and goal tracking much simpler.

This article was developed in collaboration with Frollo, a Stockhead advertiser at the time of publishing.

This article does not constitute financial product advice. You should consider obtaining independent advice before making any financial decisions.