Everyone is paying more because of Afterpay, advocates claim

Misa Han
November 12, 2018
AFR
The rise of the “buy now, pay later” sector, led by sharemarket darling Afterpay Touch, has been a boon for retailers targeting Millennial shoppers, but consumer advocates argue it has left all customers paying more.
As a Senate committee prepares to scrutinise the sector as part of a broader look at non-bank lenders, the Financial Rights Legal Centre has argued the cost of the service is being passed on by retailers to all customers.
Afterpay allows customers to pay for goods in four instalments without charging interest, but instead charges retailers a transaction fee. Customers who are behind on their payments also pay late fees.
The Financial Rights Legal Centre’s argument is Afterpay, like other lenders, should be required to do responsible lending checks, because all customers are effectively paying interest to Afterpay in the form of higher costs.
Extra fees
“This model simply hides the cost of finance under the guise of ‘fees’ for providing a service,” Financial Rights Legal Centre said in the submission to the Senate.
“We see many cases of products being sold with a claim that they are zero-interest, where the price of interest is in reality just built into the retail price of the goods – the value of the goods being purchased often significantly less than the amount being borrowed by the consumer.
“Consumers are effectively charged extra fees with this form of credit, without being protected by responsible lending obligations or access to external dispute resolution.”
The Senate Economics References Committee is looking at “unlicensed financial service providers including buy now, pay later providers” as well as payday lenders and debt management companies.
The Financial Rights Legal Centre says the majority of revenue for buy now, pay later service comes from the fees paid by retailers and merchants, which means the costs are simply covered by increasing the price of goods across the board.
Calls to license Afterpay
The centre’s recommendation is that at a minimum, the consumer credit laws should apply to Afterpay and Afterpay should be licensed and subject to the same requirements as all other lenders.
The group says the law also needs to be expanded to address a number of the unique aspects of these services including regulating late fees, multiple accounts, ensuring appropriate identity checks, preventing locking users out of accounts and restricting the use of these services by minors.
Consumer group CHOICE is also calling for Afterpay to be subject to the national consumer credit laws, so as to stop the buy now, pay later sector from “preying on those who can’t repay on time and unfairly profiting from this perverse incentive”.
These calls for stronger regulation of Afterpay comes as the Consumer Action Legal Centre is calling for closing a loophole so Afterpay has to do responsible lending checks and provide hardship assistance, as revealed by The Australian Financial Review on Monday.
Shares in Afterpay, which is led by Young Rich Lister Nicholas Molnar, lost 7.3 per cent to $12.50 on Monday. The stock is trading well below a 12-month high of $21.13 hit in August, but has still gained 110 per cent in the past year.
No compound interest problem
Afterpay argues requiring it to conduct responsible lending checks would add paperwork, delays and an administration cost that would potentially exceed the value of the goods being purchased, given the average transaction value is only $150.
​Afterpay said in its submission it should not be brought under the consumer credit laws because its consumers don’t have compounding debt problems.
“This is not just a technicality or a loophole – it is a fundamental feature of our product that consumers do not pay any interest or credit charges, so they cannot find themselves with compounding debt problems. All they agree to repay is the original purchase price, and no more,” it said.
Afterpay said it carries less risk than a home loan or a traditional credit card, because a customer repays only the original purchase price by four equal instalments without any additional charges, so long as they pay on time.
It said unlike other products, customers cannot use Afterpay for cash advances or refinance other consumer debt.
The Australian Securities and Investments Commission, which is conducting its own separate inquiry into the sector, did not publicly release its submission to the Senate on Monday.
The Australian Competition and Consumer Commission and the Australian Financial Complaints Authority said they did not make a submission to the Senate inquiry.