Are buy now, pay later platforms harming our kids?

My teenage son asked me this week if he could buy a bike using a buy now, pay later (BNPL) scheme. I laughed – and said ‘‘no’’.

He asked why not. My reply was ‘‘that’s the fastest way to end up poor, my boy’’.

Spending money you don’t have on something you want now is a sketchy financial strategy. Being encouraged to do so is socially negligent.

Letting our young people sleepwalk into debt before they’ve ever had to make a meaningful financial decision is the quickest way to lock in a poverty mindset and set them on the road to financial failure.

Yet, schemes have now so firmly embedded themselves in the way young people are spending that ‘‘AfterPay’’ has entered common parlance as a verb – and their stranglehold is growing.

Like credit cards, BNPL schemes have been shown to prompt people to spend more or make purchases they otherwise wouldn’t have made.

I’m no great fan of credit cards either, but here’s the rub – BNPL schemes aren’t required to check that their customers can afford to repay the debt before approving the facility.

That’s because they don’t (technically) charge interest, so fall through the cracks in the legislation. That includes the recently beefed-up Credit Contracts and Consumer Finance Act, which has resulted in lenders scrutinising borrowers’ spending habits like never before, before lending them money.

The irony is that while the BNPL companies aren’t subject to those rules, the banks are now combing your statements for buy now, pay later transactions as a result of that legislation, because using them tells a story about your financial management, a story that affects your ability to borrow to buy a property.

Despite the absence of interest, just like credit cards you can end up paying more and getting behind if you overcommit yourself, or life intervenes with an unexpected bill while you’ve got several AfterPay transactions on the go.

AfterPay says that in Australia and New Zealand its top 10 per cent of consumers use the service more than 60 times per year, with each transaction being six weeks long. Multiple transactions at any one time increase the chances of consumers falling behind on their fortnightly repayments. Late fees can climb to (albeit, are capped at) 25 per cent of the purchase price.

So, it’s not a great way for our kids to learn about money management, but here’s the thing – AfterPay and fintech companies like them are only beginning their march into our financial affairs.

For starters, in Australia, AfterPay has announced you’ll now be able to use the service at bars and restaurants – which goes against even the most basic of financial principles that if you are going to borrow from tomorrow, make sure you’re buying something that lasts more than a day. Instead, you’ll be paying off that hangover or slap-up meal for weeks after you’ve digested it – and any late fees you incur will add literal meaning to the term ‘‘money down the drain’’.

But it gets more interesting. AfterPay has just launched its app Money by AfterPay, which promises to help you manage your money, monitor your savings and ‘‘hack your spending habits’’. I’m sceptical that any organisation with a business model built on me borrowing to buy something is truly interested in helping me improve my financial habits. It’s like entrusting McDonald’s to help you maintain a healthy diet.

Other new features include the ability to have a debit card attached to the account, and ‘‘Retro AfterPay’’ which allows you to retrospectively turn a transaction into an AfterPay payment. What that really means in practice is you can borrow against money you’ve already spent if you need that cash back – albeit in small amounts, for the time being.

As with most things, it’s not all bad. Some people will use AfterPay fairly harmlessly – perhaps never spending when they can’t afford to, and never incurring a single late payment fee.

But it’s clearly designed to target young people – just check out the number of emojis in the new app’s description. Young people already have a steep financial hill to climb with big student loans and high house prices.

AfterPay-type schemes encourage and enable them to spend more. They embed a mentality of instant gratification and leaving the consequences for future-you. Worse, they ensure young people form borrowing and spending habits before they’ve ever had the chance to form saving and investing habits.

The buy now, pay later sector has charged ahead and put down roots in our wallets – and our kids’ wallets. Regulators are struggling to catch up, and it’s high time they did.

AfterPay-type schemes embed a mentality of instant gratification and leaving the consequences for future-you.