Buy now pay later fees surge, causing some to skip meals: ASIC

One in five people using services such as Afterpay and Zip Pay were skipping essentials like meals in order to make their repayments on time and avoid paying late fees, a regulator has found.

Fintechs offering buy now pay later services made about $43 million in late fees for the 2019 financial year, ASIC’s latest Buy Now, Pay Later report found, which is 38 per cent more than the year before.

The report -- based on data from six providers, four banks and a consumer spending survey -- found that 21 per cent of people using the services were being charged late fees.

And that, out of the 1.1 million late transactions, 45 per cent were being hit with them multiple times.

“Buy now pay later arrangements are clearly popular as a payment method,” ASIC said. “While working for the majority of users, some consumers are suffering harm.”

Based on the collective data analysed by ASIC, from providers AfterPay, BrightePay, Humm, Openpay, Payright and Zip Pay, revenue jumped by 50 per cent in a financial year, from $266 million in 2018 to $398 million in 2019.

Some skip meals to make payments on time

Buy now pay later services make it possible for people to make purchases now and repay them over a series of instalments -- typically four. They generally charge late fees rather than interest and also make money from their relationships with retail stores.

But ASIC’s analysis found some customers are making purchases they can’t afford to repay on time, and that they’re having to go without to make ends meet.

About 20 per cent of 1655 people surveyed said they cut back/went without meals and other essentials, while 15 per cent said they had taken out an additional loan.

And about half of these people were aged between 18 to 29.

“It’s alarming if people are prioritising buy now pay later debts over essentials, or paying off other interest-charging loans," Gerard Brody said, chief executive of Consumer Action Law Centre. 

"The best way to address this and limit the harm is to apply responsible lending obligations and other credit laws to the buy now pay later sector."

Buying with Afterpay, but spending more on credit cards

The Australian Securities and Investment Commission (ASIC) identified a concerning pattern by looking over the banking data of buy now pay later users.

“We found that a consistently higher proportion of buy now pay later credit card users incurred interest charges on their credit cards: between 66 per cent and 73 per cent for all months between October 2018 and January 2019 inclusive,” ASIC said.

“In the same period, only 42 per cent to 46 per cent of other credit card users incurred an interest charge on their credit card.”

Buy now pay later credit card users also showed a higher proportion of interest charges incurred on their credit cards in a comparison of gender and age ranges.

More people are buying now, paying later

Buy now, pay later services are more popular than ever. About 16.8 million purchases were made using the emerging technology in the 2018 financial year, but that number increased by a whopping 90 per cent in 2019.

There were more than 6.1 million open accounts as of June 2019, ASIC said, representing up to 30 per cent of the Australian adult population.

And these accounts could be used to make purchases at a combined 56,000 stores.

AfterPay is the largest provider of buy now pay later services, accounting for 73 per cent of $5.6 billion in transactions in 2019, followed by Certegy and Zip Money, which accounted for 11 per cent each.

Regulation and a code of practice

The buy now pay later category is not governed by the National Consumer Credit Protection Act, making it easier for people to sign up to the service, but regulatory standards and a code of practice are being developed.

ASIC’s design and distribution obligations will require buy now pay later companies to target customers who can afford their products. The requirement is intended to focus on promoting good consumer outcomes, ASIC said, rather than imposing “prescriptive compliance obligations”.

There’s an expectation buy now pay later companies will review the outcomes of their customers, and consider if changes should be made to the product, the way it’s sold or the target market.

But the fine details won’t be decided by ASIC. “Policy and regulation of the buy now pay later industry remain a matter for Government and, ultimately, the Parliament,” the regulator said.

Meanwhile, the buy now pay later industry is working on a code of practice, but it won’t be published until March next year.

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