By Colin Kruger and Lucy Battersby
Afterpay has defended the financial strength of its customers and denies there are any implications for its business after the corporate regulator released a report on the buy now, pay later sector saying one in five users have missed payments and gone without meals to pay their bills.
The Australian Securities and Investments Commission's (ASIC) report into the burgeoning sector found some users were experiencing financial hardship, with 21 per cent of buy now, pay later (BNPL) users who responded to its survey reporting they had missed a payment in the last 12 months.
"From our research, we also found that some consumers who use buy now, pay later arrangements
are experiencing financial hardship, such as cutting back on or going without essentials (e.g.
meals) or taking out additional loans in order to make their buy now, pay later payments on time," the regulator said.
The buy now, pay later sector has exploded in recent years.Credit: Dominic Lorrimer
However, in a statement on ASIC's report Afterpay said its own research had found “no causal link between spending on Afterpay and changes in spending on essentials". Afterpay said its information was based on data from 144,000 users.
An Afterpay presentation to the UBS Australasia Conference on Monday also refuted suggestions from a UBS report that up to 18 per cent of its customer base in Australia were on JobSeeker. The company said its data showed as few as 10.5 per cent were on the job payment scheme which is slightly less than the general population.
"At the end of the day, Afterpay's best customers are the ones who can afford to pay, and pay on time," Afterpay's head of public policy Damian Kassabgi told the UBS conference.
ASIC said in the report it would not impose further compliance rules on the burgeoning buy now, pay later sector despite the evidence of financial hardship.
It said regulatory changes being introduced together with the code of conduct being developed by the industry "provide an opportunity for the industry to address consumer harm" that it identified.
Buy now, pay later use has exploded in recent years with transactions nearly doubling to 32 million last year, but there has been controversy over the fact that the sector is not regulated under the National Consumer Credit Act and retailers are not allowed to pass on the surcharge to customers.
The founders of the sector's biggest player, Afterpay, have become billionaires this year as the share price has soared alongside rivals such as Zip Co, Splitit and Sezzle.
Zip Co chief executive Peter Gray said that while the industry code “is a very good start, Zip will continue to implement its own higher standards, particularly around customer suitability".
Milford Asset Manager product manager Roland Houghton said the regulator was urging BNPL operators to be more responsible with those who have multiple platforms and those that have missed payments multiple times. "One thing that was obvious in the survey is that there is a particular cohort that account for a large portion of those late fees," he said.
In its report ASIC said 20 per cent of consumers surveyed said they had cut back, or went without essentials, such as meals, and 15 per cent said they had taken out an additional loan. Half of these respondents were aged 18 to 29.
"Buy now, pay later arrangements are clearly popular as a payment method. While working for the majority of users, some consumers are suffering harm," ASIC said.
But the report contained no fresh regulatory dangers for the sector. "ASIC made no material changes or recommendations against buy now, pay later [sector]," Mr Houghton said
Afterpay said the report was consistent with government recommendations that sector regulation “is fit-for purpose and considers the various emerging products and business models”.
The report also found that a consistently higher proportion of BNPL users with credit cards incurred interest charges on their credit cards. Between 66 per cent and 73 per cent of these users incurred credit card interest charges for the period covered compared with 42 per cent to 46 per cent for credit card holders who don't use buy now, pay later.
ASIC said missed payment revenue for all of the buy now, pay later vendors covered in the report declined as a proportion of revenue and noted that this continued to be the case from January to June this year despite the pandemic.
The report noted the design and distribution obligations (DDO) for financial services groups - the newest tool in ASIC's expanded armoury - will be introduced in October next year.
The DDOs work to accompany ASIC's product intervention powers which allow the regulator to stop poorly designed products being sold in the first place.
"These new regulatory tools, which focus on consumer outcomes and harms rather than imposing prescriptive compliance obligations, will play an important role in promoting good consumer outcomes," the report said.
The new DDOs are designed to make banks and other product providers such as those in the buy now, pay later sector stop and think about what types of consumers will be buying their products, and whether those consumers are appropriate to the product.
RBC Capital said it does not see any adverse changes for Afterpay and Zip from the report.
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