personal finance

'Just another type of debt': Australia's struggle to regulate buy now, pay later firms


When financial counsellor Claire Tacon answers a call at Australia’s National Debt Helpline, she always asks one question: are you using buy now, pay later?

Increasingly, the answer is yes. She recently spoke to a woman who had a $35,000 personal loan on a high interest rate to a bank, when her car broke down.

The woman said she had no choice but to use Afterpay to get $1,000 to fix it.

“Often people don’t even mention those contracts,” Tacon says. “They call because they can’t afford to pay their rent, or they call because they’ve got this massive energy bill.

“When you dig a bit deeper and you wonder where the money is going, more and more people mention, almost as an afterthought, an Afterpay, a Zip [Money], Latitude.”

The lure of buy now, pay later, or BNPL, products has turned consumers away from their credit cards in ever-increasing number and made millionaires of investors who have backed companies such as Afterpay and Zip Money.

The pitch is simple: instead of paying cash or putting it on the plastic, use an app to put down an instalment today, walk away with your new shoes, iPhone or power tool and pay off the rest later. It’s the opposite of a layby scheme.

Crowds of shoppers on Market Street, Sydney, Australia.
Shoppers in Sydney’s CBD. Photograph: James Gourley/EPA

From nothing, the sector has exploded. The value of transactions through market leader Afterpay doubled last year, from $5.2bn to $11.1bn.

The companies say their product is cheaper for consumers to use than a credit card, and point to a new code to counter claims that the industry is too loosely regulated.

The enforceable code, developed by the industry and in force from 1 March, is intended to protect consumers by providing standards about the suitability of the product, the information it provides and how complaints are handled.

But consumer groups say BNPL products, which have escaped regulation as loans, are just another way people can get themselves into too much debt. They want the products subjected to the same laws as other credit.

The chief executive of the Consumer Action Law Centre, Gerard Brody, says his financial counsellors and lawyers are increasingly being contacted by people who have accumulated significant debt on buy now, pay later platforms.

It is common, he says, for people to prioritise these repayments over other essential items because of fears they will be kicked off the app.

“It’s just another type of debt on top of credit card debt, utility debt, rental arrears.

“The very light regulatory framework around buy now, pay later, it risks these being accessed for purposes that aren’t suitable for the borrower.

“Even payday lenders are required to assess whether the loans are not only affordable but that the loan’s purpose meets the purchaser’s needs.”

An Afterpay sign is seen in a store window in a shopping centre in Sydney. Over the past year, the share price of Afterpay has more than tripled.
The value of transactions through Afterpay doubled last year, from $5.2bn to $11.1bn. Photograph: Derek Rose/AAP

Brody is increasingly concerned by the range of products which can be purchased on the platforms, from healthcare to alcohol and solar power systems, which had been spruiked by door-to-door salesmen.

He says larger retailers who have partnered with the platforms should consider whether they are harming their customers.

“The big retailers could play a role in ensuring the buy now, pay later products are safe and regulated.

“They have responsibilities to their customers as well.

“I wouldn’t think the big retailers would like to see their customers in financial hardship because of a credit product they’re offering at point of sale, so I would like the big retailers to take a more proactive role.”

One person who sought assistance through the law centre, Adelaide teacher Rachel Black, says she had acquired significant debt through payday lending, and occasionally turned to Zip Money to afford groceries.

She was troubled by the ease of registering for the platforms, and says she knows other families in Adelaide’s northern suburbs that are similarly reliant on them to buy essentials.

Tacon says the call from the woman about her broken-down car was the second that week that illustrated the allure and possible dangers of BNPL.

She had also heard from a woman who was able to use up to $4,000 with a BNPL provider, despite having fallen behind on a $1,000 contract with another provider, which was incurring late fees.

The client, a psychiatric nurse, had seen her income fall as Covid-19 restrictions affected the number of shifts she could do.

“It’s never the only problem they have,” Tacon says. “So many people we speak to have every cent of their money, paycheck to paycheck, accounted for.

The road to regulation

The UK government announced earlier this month that it would be regulating the sector, putting in “the same protections you’d expect with other loans” according to John Glen, the economic secretary to the Treasury.

“We’re making sure people are treated fairly and only offered agreements they can afford,” Glen said.

People walk through the shopping district of Oxford Street in London.
People walk through the shopping district of Oxford Street in London. In the UK, BNPL firms will have to conduct proper affordability checks before lending. Photograph: Mike Kemp/In Pictures/Getty Images

The Australian regulator, the Australian Securities and Investments Commission, is actively monitoring the sector and has raised concerns about the dangers of consumers running up big bills.

According to Asic research, the industry reaped more than $43m for missed payments in 2019, up 38% on the previous year, and some consumers were in financial hardship – including some who cut back on buying food – as a result of using BNPL schemes.

The number of BNPL accounts in Australia soared from less than half a million in 2016 to 3.7m in 2019, Asic said.

However, Asic lacks the power to take similar regulatory action to its UK counterpart.

Asic regulates consumer lending under the National Credit Code, but BNPL products fall outside its remit due to a quirk in the law that requires a fee to be charged to consumers for their credit for it to qualify as a loan.

Because BNPL fees – which can be around 4% of the face value – are paid by merchants, they are not regulated as loans.

This leaves the public protected only by general consumer law against things such as misleading or deceptive conduct.

Not surprisingly, the BNPL platforms don’t think they need to be regulated any more than they are.

Afterpay’s head of public policy, Damian Kassabgi, points to the company’s cap on fees and its policy of throwing people off the platform as soon as they default.

Zip signage on a shop in Sydney. The company’s co-founder Peter Gray says it has a lower proportion of people falling behind on their payments than credit cards.
Zip signage on a shop in Sydney. The company’s co-founder Peter Gray says it has a lower proportion of people falling behind on their payments than credit cards. Photograph: Derek Rose/AAP

“If anything, I think what Afterpay has done is lifted standards, from the National Credit Code,” he says.

Zip Money co-founder Peter Gray says the company has a lower proportion of people falling behind on their payments than credit cards.

“We have rigorous onboarding checks which involve ID, credit and affordability checks, and less than one in 100 Zip customers is late in any given month,” he says.

“Certainly the hardship number is significantly less than that.”

He says the product needs “appropriate” regulation.

“There are a few carve-outs in the current legislation for payday loans and credit cards, so what we’re suggesting is that an appropriate carve-out of that regulation fit for purpose for our industry would be appropriate.”

With Asic in internal turmoil and under attack from the government for being too forward with policy suggestions, the regulator is unlikely to lobby for stronger regulation any time soon. But the sector will this year face a potential regulatory challenge from the Reserve Bank, which regulates the payments system.

It has raised concerns over BNPL companies banning merchants from passing on fees they charge to use the service.

The RBA has previously banned credit card operators, including Visa and Mastercard, from doing the same.

In a speech in December, governor Philip Lowe said that despite BNPL’s ferocious growth, it was still far too small to regulate in the same way.

Reserve Bank of Australia Governor Dr Philip Lowe durning The House of Representatives Standing Committee on Economics at Parliament House in Canberra, Wednesday, December 2, 2020.
Reserve Bank of Australia governor Dr Philip Lowe said last December that the buy now, pay later sector was still too small to be subjected to strong regulation. Photograph: Mick Tsikas/AAP

But the issue is being re-examined as part of an RBA review of the retail payments system that is due to report back in the middle of the year.

If no-surcharge rules were banned, BNPL fees could be added to the price of goods, potentially deterring users. BNPL providers might instead cut their fees, but either course would make turning a profit even harder.

Afterpay’s Kassabgi says that at around 1% of payments, BNPL products are a long way south of the point where the bank stepped in to regulate credit card fees.

“The RBA didn’t regulate cards until they were about 60% market share, so they were very embedded into the economy before there was intervention,” he says.

Zip Money’s Gray rejects the idea point blank.

“We should not be regulated under the schemes regulation of the RBA, and we’re sufficiently regulated as is,” he says.

Following the fraud

Left unsaid in the UK government statement about regulating the sector was an increasing fear the platforms could be used to commit crime, as occurred with the introduction of other financial products such as smart ATMs and touch-and-go or paywave technology.

IDCare, a not-for-profit consumer support organisation, received 1,600 incident reports alleging fraud or identity theft using BNPL products in Australia last year, double the number of the year before. BNPL was used much more often than credit cards in reported frauds of amounts less than $5,000.

There have been few serious crimes linked to BNPL in Australia. But larger retailers have been targeted by people who buy goods with a high resale value, such as power tools, using the platforms.

While the platform provider guarantees each sale and pays the merchant upfront, if the platform operator then detects a possible crime, it will contact the police, who may then contact the merchant as part of their investigation.

Shoppers queue outside Bunnings in Myaree, Perth, Australia.
Shoppers queue outside Bunnings in Perth. Because Buy not, pay later fees are paid by merchants, they are not regulated as loans. Photograph: Paul Kane/Getty Images

Kassabgi says Afterpay has sophisticated systems in place to stop fraud.

“Some days between 30% to 50% of transactions are rejected because we believe there has been some kind of fraudulent activity,” he says.

“Purchasing something like an iPhone has a high risk rating because it’s the kind of thing that you could sell. If you want to purchase a pink pair of size 11 shoes that have open toes, that’s a relatively niche purchase.”

Such problems have not worried investors.

Over the past year, the share price of Afterpay has more than tripled from about $40 to more than $150 while stock in Zip Money has doubled from about $4.30 to almost $8.70.

The spectacular gains have been realised even though both companies are losing money. Zip reported a $453.8m loss in the six months to December, on revenue that increased 130% to $160m. Afterpay is due to report its half-year figures on Friday.

But investors believe both are capable of achieving the kind of scale that will make big profits flow in the future.

Afterpay’s head of investor relations, Marie Festa, says the company’s fast growth and high margins on transactions in Australia gives it a model to scale up and make money around the world.

“We are still a very young company that is really investing in growth and expansion,” she says.

Zip’s Gray also points to the company’s growth.

“External people evaluate the level of engagement that we have with consumers and the way we’re able to scale, our very low operational costs, so there’s significant value in the business,” he says.

However, it’s not a universally held view. Analyst Grant Halverson says the valuations slapped on the sector by the market are overblown given their businesses are still small compared with credit cards, the potential for stronger regulation as they get bigger and the narrow margins they enjoy.

“What happens on the share market is not necessarily what happens in the real world,” he says, comparing the situation with the early 2000s dotcom bubble.

“The great thing about the stock market is that it’s right,” he says. “Until it’s wrong.”



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