Should credit rules apply to Afterpay and other buy now, pay later plans?

Buy Now Pay Later (BNPL) providers don’t have to operate under the same rules as traditional credit providers because their offerings are not captured by the National Credit Act.

Buy Now Pay Later offerings such as Afterpay have exploded in popularity online, but now questions are being asked about a suitable regulatory regime.

In a submission to the Senate Economics References Committee inquiry into credit and financial services targeted at Australians at risk of financial hardship, the Consumer Action Law Centre (Consumer Action) shared a case study about a young man named Jeremy, who has an intellectual disability and receives income from Centrelink.

Jeremy has debt of about A$1000 with ZipPay for online shopping for a speaker and alcohol, and a debt of A$350 with Openpay for a sportswear purchase. Consumer Action is acting on Jeremy’s behalf, for this debt and more, to help him find a way out of what its staff believe was unnecessary financial strife.

The problem, says Consumer Action CEO Gerard Brody, is that buy now, pay later (BNPL) providers don’t have to operate under the same rules as traditional credit providers because their offerings are not captured by the National Credit Act. This is despite the fact that some may fund up to A$30,000 of purchases.

How are BNPL providers not credit providers? Afterpay, for example, doesn’t charge interest or other costs to customers – although it does charge late-payment fees, making up 20 per cent of its revenue. Instead it collects purchase costs on behalf of retailers over four equal, fortnightly payments. The company charges retailers, rather than customers. A flat fee of 30 cents per transaction, plus a commission ranging from 4 per cent to just over 6 per cent (depending on value and volume of transactions), is removed from the payment for the item before that payment is forwarded within 48 hours to the merchant. As soon as the transaction is made, Afterpay assumes all risk.

“While they may say they get very few complaints, I’ve got serious questions about the way in which they come up with those figures...” Gerard Brody, Consumer Action Law Centre

How does this compare to other offerings? EFTPOS charges a monthly plan fee, usually ranging from A$55 to A$225, depending on “included value”, then a 1.5 per cent fee is added to each transaction beyond that included value. Visa or MasterCard debit transactions typically cost merchants 0.5 to 1 per cent of each transaction’s value. Visa, MasterCard and American Express credit card transactions take this cost up to 1 to 2 per cent.

“We recognise that credit will always exist, and we’re not suggesting that all credit is banned,” Brody says. “It can be a helpful tool to make purchases and manage money. But we consider it important that there are appropriate consumer protections and oversight of institutions that are lending consumers money.”

Checks and balances

Afterpay is one of the biggest players on the BNPL field. It did not respond to requests for an interview for this story, but the company’s online fact sheet says it declines about 30 per cent of order requests based on a customer’s lack of available funds, or a track record around identity, fraud or payments.

Prior to approving payments, the listed company says a “proprietary fraud and repayment capability check” is carried out – essentially an artificial intelligence function that scans past financial records.

BNPL providers appeared before the Economics References Committee’s inquiry. Anthony Eisen, Afterpay’s executive chairman and co-founder, described to the committee the checks they carry out before lending.

“Checks are performed digitally and they occur in real-time,” he said. “Our checks revolve around three core areas. The first area is identity and fraud. The second is merchant risk and product risk. The third is around repayment capability. Our processes are enhanced for first-time customers and that’s relevant to the way that they have to make their first-time payments, that they have limits markedly reduced and that they only increase with positive behaviour over time. If, as a customer with Afterpay, you miss one single payment, your account is immediately suspended.”

Eisen said that by applying up-front rules in combination with built-in protections, the vast majority of customers used the product responsibly and could only do so when their account was up to date.

About 2.5 million Australians had used BNPL arrangements with Afterpay as of early 2019.

For most, it was a positive experience and better value than a high-interest credit card. Judging by the fact that over 20,000 businesses have installed Afterpay functionality into their online shopping basket systems, the system seems palatable for retailers, too.

As BNPL usage booms, credit card account numbers are falling for the first time – down 4.3 per cent in the last 12 months, according to the Reserve Bank of Australia. There are always exceptions, however, and these land in the lap of Consumer Action.

“There are many hundreds of thousands of Australians struggling with debt, and that can have a significant impact not only on their financial wellbeing, but also on their mental and physical wellbeing,” Brody says. “We think it’s appropriate that all credit providers be appropriately regulated.”

The 2018 Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry has revealed that even the strictest of regulation does not always lead to positive outcomes. Brody believes, however, that it pays to err on the side of caution.

Brody says appropriate regulation and effective consumer protections should enhance consumer choices, not diminish them. “If you are a licensed credit provider in Australia, you get a licence from ASIC. You are required to have an internal dispute resolution process and abide by certain standards. You’re also required to be a member of an external dispute resolution scheme, the Australian Financial Complaints Authority. The BNPL providers aren’t required to do any of that.

“While they may say they get very few complaints, I’ve got serious questions about the ways in which they come up with those figures, and also whether people even understand that they can make a complaint.”

The Economics References Committee, reporting in February, recommended the government consider what regulatory framework would be appropriate for the BNPL sector, and that the sector develop a code of practice.

Its 20 recommendations would involve consultation with a number of regulators including ASIC, indicating further regulation may be considered by the government.

Read next: Australia's big appetite for consumer debt

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