Slow Regulators A Risk To Consumers And Financial Innovators

The creep of Buy Now Pay Later (BNPL) services to alcohol outlets is alarming, more so because it highlights the slow response of New Zealand regulators to financial innovations, which not only causes problems for consumers but also kills the financial innovation we desperately need.

Meurig Chapman, CEO of Happy Prime, a leading specialist in credit risk within the corporate banking and financial services sectors, is worried that the availability of BNPL credit services in alcohol sales will be met with a knee-jerk response from regulators who could well kill off an otherwise innovative and valuable financial service.

Chapman says extending BNPL to alcohol outlets highlights the urgent need for regulators to act faster.

“We’ve seen this play out before with peer-to-peer lending, where regulator inaction allowed the product to develop with considerable time, effort and investment, only for them to stomp on it. BNPL faces the same risk.

“New Zealand is a monopolised financial market with a limited choice of boring, vanilla financial products. Part of what is killing innovation is the tardy response by regulators. It’s almost as if they get caught with their pants down and respond by taking a sledgehammer to crack a nut,” says Chapman.

He says BNPL has transformed the way people finance purchases, offering an interest-free way to spread payments over time, but it may have done itself some damage by entering the alcohol market—raising ethical questions and fears that some customers may indulge in potentially harmful purchases.

The rise of BNPL comes against a backdrop of soaring living costs, with consumers increasingly turning to short-term finance to meet their immediate needs.

Retail, hospitality, and professional services have seen widespread adoption of BNPL, but the regulatory framework remains largely behind the curve. Despite various working groups and consultations, New Zealand's financial regulators have been slow to adapt.

Chapman believes the regulators’ slow response is what’s most concerning.

“BNPL is innovative and can be a valuable financial tool, but only when it’s regulated properly. What’s happening now is that BNPL providers are operating outside the Credit Contracts and Consumer Finance Act (CCCFA).

“They aren’t held to the same standards as traditional lenders, which means their credit assessments are not as robust, and that’s risky for consumers.”

Without the protections of the CCCFA, BNPL users often face fewer checks on their ability to repay, which leads to increased debt exposure. While many BNPL users manage their payments well, others fall into arrears, and the ease of access to such services can exacerbate financial hardship. The risk becomes even more pronounced when BNPL is used to purchase essentials or harmful products like alcohol, creating a cycle of debt that is difficult to escape from.

“Peer-to-peer lending could have been a valuable addition to the financial landscape but was essentially regulated out of existence. BNPL faces the same risk. We could see the same outcome if regulators don’t move quickly and strike a balance between innovation and protection.”

The consolidation within the BNPL market further complicates the situation.

Several providers have already shut down due to rising arrears, and Chapman says that within the next few years, the market could be dominated by a handful of multinational companies.

“If regulation doesn’t come soon and BNPL survives the regulators, we’ll see fewer players in the market.”

Chapman says the solution lies in balancing innovation with responsible lending practices.

“BNPL needs to be brought under the same regulatory umbrella as other forms of credit. That doesn’t mean stifling innovation, but it does mean making sure there are adequate protections in place for consumers.”

Chapman offers three tips for responsible use of BNPL services:

1. Avoid using BNPL for everyday needs.

BNPL should be used for discretionary purchases, not essentials like groceries. If you’re relying on BNPL for basic needs, it may be time to reconsider your budget.

2. Track all payments

Managing multiple BNPL accounts can become overwhelming. Ensure you have a clear system to track payments, due dates, and amounts to avoid missing payments or accruing late fees.

3. Consider alternatives for larger purchases

For significant purchases, look at other options like personal loans, which may more structured repayment plans than BNPL.

Chapman says that while BNPL offers flexibility and convenience, it requires a strong regulatory framework to ensure that consumers aren’t left vulnerable and that innovative products aren’t strangled out of existence.

“The financial sector is constantly evolving, and BNPL is a good example of innovation. But without timely intervention from regulators, we risk seeing the same mistakes repeated, as with peer-to-peer lending. The focus should be on ensuring BNPL is used responsibly without stifling the potential it brings to the market," he says.

ABOUT 

Established more than seven years ago, Happy Prime is a risk consultancy firm based in Auckland that helps firms decrease or eliminate risk in areas such as a business's operational, financial, and technology functions. Most of Happy Prime's work is with banks, finance companies, and utility providers.

Happy Prime helps clients navigate regulatory challenges and economic fluctuations, offering unique, expert solutions to manage credit risk and compliance. It focuses particularly on sophisticated risk strategies to de-risk businesses from potential market volatility and regulatory oversights.

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