ASIC proposes extending product intervention powers as new review details risks of ‘buy now, pay later’

“Buy now, pay later” arrangements are pushing some consumers to take on more debt than they can handle, ASIC review finds.

Jill Latt-Day, 23, Albion, and Emma Hislop, 26, Red Hill, have both used Afterpay when shopping, Queen Street Mall, Brisbane. Photographer: Liam Kidston.

“Buy now, pay later” arrangements are causing some consumers to become financially over committed, an ASIC review of the industry has found.

Data from July 2016 to June 2018 showed that 60 per cent of “pay later” users were aged between 18 to 34 years.

There was $903 million in outstanding “pay later” balances at June 30 this year, the review said.

One-in-six users had either become overdrawn, delayed bill payments or borrowed additional money because of a “pay later” arrangement, and most consumers believed it would allow them to spend more than they normally would.

“Although our review found many consumers enjoy using buy now, pay later arrangements and plan to continue using them, there are some potential risks for consumers in using these products,” said ASIC commissioner Danielle Press.

“We found that buy now pay later arrangements can cause some consumers to become financially overcomitted and liable to paying late fees.”

“Pay later” arrangements, which allow consumers to take an item immediately and defer the payment, have become increasingly popular in Australia, with the number of consumers who have used such arrangements increasing five-fold between the 2016 and 2018 financial years.

The number of “pay later” transactions increased from about 50,000 during the month of April 2016, to 1.9 million in June 2018, ASIC said.

“The exponential growth in this industry, along with the risks we have identified, means this will remain an area of ongoing focus for ASIC,” Ms Press said.

“One area we will be targeting is where consumers are paying more than they need to for using a buy now pay later arrangement.”

The review, which looked into Afterpay Touch, zipPay, Certegy Ezi-Pay, Oxipay, BrightePay and Openpay, found that providers used behavioural techniques which could influence consumers to make a purchase without fully considering the costs.

Some providers offered fixed term contracts up to 56 days for amounts up to $2,000, other providers offer a line of credit for amounts up to $30,000, the review found.

“Given the potential risks to consumers, ASIC supports extending the proposed product intervention powers to all credit facilities regulated under the ASIC Act,” the commission said.

“Product intervention powers will provide ASIC with a flexible tool kit to address emerging products and services such as buy now pay later arrangements.

“This will ensure ASIC can take appropriate action where significant consumer detriment is identified.”

“Pay later” arrangements are not regulated under the National Credit Act and providers are not required to be licensed or to comply with the responsible lending laws that prohibit a lender from providing credit that would be “unsuitable” for the consumer.

Still, arrangements are considered “credit facilities” under the ASIC Act, which means that ASIC can take action where a provider engages in conduct that is misleading or unconscionable.

Afterpay (APT) responded to ASIC’s review saying it looks forward to working with the commission as it monitors the industry.

“Afterpay acknowledges that our product is not for everyone and consumer protection needs to be in place,” the company said in a statement to the market.

“We are committed to continuous improvement, and as innovators, we believe there is always an opportunity to do more for our customers.”

In a separate update to the market, Afterpay said the pre-Christmas trading period had been above expectations.

Zip Co also issued a statement also welcoming ASIC’s enquiry, and touted its identification check processes for its Zip Pay product.

It also said its business model does not rely on late payment fees or customers not being able to afford their repayments to drive revenue.

“We believe we are well placed to satisfy any changes to regulation with little or no disruption to our business and believe it may benefit our competitive positioning,” the statement said.