Forward Slash podcast: Beware pitfalls of buy now, pay later

So-called buy now, pay later companies like Zip and Afterpay are facing calls for greater regulation.

So-called buy now, pay later companies like Zip and Afterpay are facing calls for greater regulation, as Australia plunges deeper into recession and vulnerable consumers increasingly run the risk of falling into debt.

Both Zip and Afterpay are now worth more than retail giants Myer and David Jones, with investors lapping up the global potential, and consumers enjoying the ease of use and flexibility.

Speaking on The Australian‘s podcast Forward Slash, Australian Financial Rights Legal Centre policy offer Julia Davis said that buy now, pay later providers are often attractive for younger consumers given they offer an alternative to a credit card, but those consumers often don’t realise exactly what they’re getting into.

“We‘ve seen plenty of examples of people who have had no income, and no ability to repay their purchases before they were approved, and they lose track of how much they owe,” Ms Davis said.

“We‘ve seen people whose debts were sold to debt collectors … Really aggressive debt collectors, who add a lot of fees and charges and come after them for those purchases. We are seeing examples of where it goes wrong.”

Ms Davis said companies like Zip and Afterpay are not classed as ‘‘credit’’ because customers generally do not pay fees to access finance. The costs of the programs are usually paid by the retailer.

She is calling on the providers to be licenced under the National Consumer Credit Protection Act, which includes extra complaint processes and regulation. Brad Paterson, the CEO of buy now, pay later provider Splitit, wants the industry to be classed as credit providers. Unlike Zip and Afterpay which are based on new debt, Splitit connects to an existing Visa or Mastercard credit card.

“Anyone providing new credit to consumers should follow the same code of conduct, the same disclosure requirements, and the same regulations as everybody else,” he told Forward Slash. ‘‘I think there’s an opportunity to get closer to the mark there, I know it’s a point of contention, but we feel strongly that it should be a level field for everybody.”

Afterpay says being subjected to the credit act would slow it down. Zip‘s chief strategy officer Tommy Mermelshtayn said providers do need to embrace regulation, but self-regulation was the most effective method, combined with ASIC’s powers.

A group of buy now, pay later providers recently teamed up with industry body AFIA for a voluntary code of conduct, to be implemented in 2021.

“ASIC was recently granted product intervention powers, so if they do see pervasive consumer harm, they can react,” he said.