Afterpay a headache for banks, KPMG says as sector profits fall

Tuesday, 18 February 2020

Buy-now-pay-later schemes have been a headache for banks in a year when profits have dropped, KPMG says.

It has released its latest Financial Institutions Performance Survey for 2019, which shows New Zealand banks' combined net profit dropped 0.99 per cent to $5.71 billion in the year.

It follows two years of steady profit growth.

Net interest income was up 4.79 per cent, driven by growth in loans of 5.37 per cent.

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The report highlighted the disruption that fintech is creating in the banking sector.

Buy-now-pay-later services such as Afterpay and Laybuy had seen huge growth, KPMG said, and that had disrupted a payments market traditionally dominated by bank-funded credit card providers.

The report said those schemes were directly competing with credit cards and small personal loans but did not have to comply with responsible lending guidelines because no interest was being charged.

'This is becoming somewhat of a point of contention.'

If responsible lending obligations were introduced for the sector it would lead to increased costs because it was expensive to apply responsible lending criteria to each application for credit, KPMG said.

That could mean higher margins charged for retailers, or a service fee for customers.

But KPMG said the services were causing problems for other lenders because customers seemed to be prioritising their buy-now-pay-later payments so they could continue to use the services.

'A typical issue seems to be occurring when a customer has a credit card with a acceptable limit within their credit capacity but then they purchase goods using several buy-now-pay-later products and paying off the buy-now-pay-later instalments on their cards.

'When the customer is unable to keep up with their credit card payments it starts to look like the credit card provider has been the one that hasn't lent responsibly.'

But KPMG said if regulations weren't brought in, banks could be tempted to join the market.

ASB has already made a move by partnering with Klarna, Europe's biggest private fintech firm and buy-now-pay-later provider.

Banks also had new capital requirements confirmed by the Reserve Bank last year.

KPMG partner John Kensington said the decision was in line with proposals although the transition period was extended and banks were given the ability to use additional types of tier one capital.

He said how successful the capital changes would be in shoring up the banking sector would depend on how it responded.

'An outcome that is suggested by many is that to achieve the new capital requirements, the banks will amongst other things likely review their books client by client and reassess and reprice risk with the possibility of credit rationing.

'For riskier clients in particular, rates will likely increase and loan covenants may become more restrictive or in more severe cases the banks may discontinue funding.

'Deposit rates will likely reduce further however there is likely to be a floor in these rates as there will be certain levels of rates where term deposit investors will start looking for another home for their money in droves, which will reduce available funding for the banks.'

He said banks would have to manage the changes through the transition period to ensure there was no shock to the economy. 'A recessionary economy is not worth the 'I told you so' it may elicit.'