Australians ditch credit cards as millennials turn to ‘buy now, pay later’ players like Afterpay, Zip
A global pandemic and the nation’s first recession in 29 years haven’t stopped the boom in ‘buy now, pay later’ services, but regulators are circling and consumer advocates warn that this modern day lay-by service leaves Australians at risk of spiralling into debt.
The model, which typically allows customers to pay off purchases in instalments and avoid fees if they pay on time, has seen massive growth amid the coronavirus crisis.
Afterpay, Zip Co and CBA’s ‘buy now pay later’ partner Klarna offer their services at the checkouts of major retailers and department stores.
But the concern is that the industry is not regulated like other financial services.
The corporate watchdog is currently reviewing the sector and is due to report back in October on how it can better protect consumers.
The Australian Securities and Investments Commission (ASIC) is looking at how other countries, including Sweden, have built in legal protections.
While Afterpay and Zip have slightly different business models, the two companies alone now have about 5.4 million customers in Australia.
Retail worker and university student Annabel Munro is an Afterpay customer.
The 21-year-old, who was discouraged by her mother from getting a credit card, uses the service to buy her skincare products and sneakers online.
Ms Munro loves the convenience. It works for her, as long as she pays on time.
But she recently fell behind, on two separate purchases, and each time was hit with $10 late fees.
After one missed payment, Afterpay itself paused her account so she couldn’t spend more.
“I was out of work during COVID and had a few items on Afterpay, which I stopped my payments on, because I was holding on to the money that I earnt,” she says.
But now she is working again, she manages to pay on time.
“I wouldn’t put big ticket items on there,” Ms Munro says.
“I would just put things that maybe you pay off in $15 increments.”
Investors betting on ‘buy now, pay later’ companies
The ‘buy now, pay later’ sector is yet to turn a profit, but that hasn’t stopped investors pouring money into it amid the COVID-19 crisis.
With a market capitalisation of about $20 billion, Afterpay has seen its share price soar from a low of $8.90 per on March 23, during the early phase of the COVID-19 pandemic, to about $75 in July.
It is now trading around the $70 mark, and comfortably sits in the ASX top 20 shares by value, joining heavyweights such as CSL, the Commonwealth Bank and BHP.
Its business model allows customers to make instant online purchases and pay off the cost over fortnightly repayments. It’s interest free, as long as they pay on time.
The company, run by billionaire founders Anthony Eisen and Nicholas Molnar, now has around 10 million active customers globally.
An active shopper is considered one who has made a purchase using Afterpay at least once in the past 12 months.
The investor frenzy comes as Reserve Bank data shows Australians have wiped billions of dollars off national credit card debt.
Since March, just before COVID-19 hit, almost 400,000 personal credit card accounts have been closed.
At the end of June, there were 13.27 million personal credit card accounts, down from 13.64 million at the end of March.
In the month of May alone, Australians dumped more than 100,000 credit cards, taking the number of cards in operation back to levels not seen since 2009.
The value of balances on personal credit cards accruing interest was $22.79 billion at the end of June, down $4.2 billion since March.
And total balances outstanding on personal credit cards was $36.03 billion, down $5.2 billion since March.
Others are also warning that as services like AfterPay and Zip Pay become more popular among younger generations, and no-fee debit cards routinely offer perks like $0 international transaction fees, credit card use will decline.
“The future looks bleak for credit cards,” says Finder’s Graham Cooke.
Afterpay a hit with millennials and young professionals
A large chunk of Afterpay’s customers (5.6 million) are in the massive US market, 3.3 million are in Australia and 1 million are in the UK.
The company, incredibly, has signed up more than 1.6 million US users since March alone. Across all its markets, it signed up more than 20,000 customers a day in the fourth quarter.
Afterpay has been especially popular with millennials making quick purchases that, on average, are worth about $153. The company says its average customer in Australia is 34 years old.
“We think there’s a major generational shift going on here,” says Afterpay head of public policy Damian Kassabgi.
He cites HILDA data also showing declining use of credit cards.
“Twenty years ago, 60 per cent of people between the ages of 20 and 35 would own a credit card, whereas that number now for the same age group is less than 40 per cent,” he says.
And as more people shop online during the COVID-19 crisis, now people of all ages are turning to ‘buy now, pay later’ services.
Research firm IBISWorld expects online shopping revenue will grow by 6.4 per cent in 2020-21, to $31.2 billion.
It predicts the ‘buy now, pay later’ industry will grow from bringing in about $679.9 million in revenue this financial year to $1.1 billion by 2024-25.
The sector’s revenue is typically generated through merchant fees, which comprise around 3 per cent to 6 per cent of transaction values.
But late payments and account fees paid by consumers also make up a portion of the sector’s revenue.
Corporate watchdog ASIC says there are ‘amber lights’
The biggest threat to the sector’s incredible run is regulation.
ASIC is currently preparing a report on the industry as a follow-up to its November 2018 report that found the products “can cause some consumers to become financially over-committed”.
Its previous report found one-in-six users had either become overdrawn, delayed bill payments or borrowed additional money because of a ‘buy now, pay later’ arrangement.
Given the potential risks to consumers, the corporate watchdog at the time supported extending proposed product intervention powers to all credit facilities regulated under the ASIC Act.
One of ASIC’s commissioners, Sean Hughes, flagged at a parliamentary hearing in early August that it was looking to overseas models including Sweden, the United Kingdom, New Zealand and California, where consumers were more clearly warned about the risks of ‘buy now, pay later’ services.
“There are some amber lights that we are paying close attention to,” Mr Hughes told the hearing.
Financial Counselling Australia chief executive Fiona Guthrie said a review they handed down last month found ‘buy now, pay later’ was becoming a much more common problem for people experiencing financial hardship and that many providers did not have adequate hardship provisions.
“For some people, even a small amount of ‘buy now, pay later’ debt can be enough to tip them over the edge,” she explains.
“That’s really worrying in a time of COVID 19 when so many people are going to find themselves struggling with bills and debt.”
Ms Guthrie says counsellors also often see one individual holding debts with a number of providers, which can accumulate and trap them in a debt cycle.
“There are also ‘buy now, pay later’ providers who sell quite expensive products such as solar panels, and debts in those cases can be in tens of thousands of dollars,” she adds.
Risk that consumers can end up in ‘financial strife’
Consumer Action Law Centre chief executive Gerard Brody says he accepts that not all ‘buy now, pay later’ players are out to cheat consumers, but the fact is the sector is not properly regulated and that leaves vulnerable people at risk.
“Some ‘buy now, pay later’ providers do cap late fees and might only offer reasonably small amount of credit, but even a small amount of debt can cause anxiety and harm if those repayments are unaffordable,” Mr Brody argues.
“It’s very accessible and quick, which means that people can sign up without actually considering whether it’s in their best interests or thinking through how they’re going to make repayments down the track.”
These debts often come on top of other debts people have accumulated via credit cards and personal loans.
“Sometimes, even these debts get referred to debt collectors, these aren’t a loan like other loans and its really concerning that consumer protections like responsible lending don’t apply,” Mr Brody observes.
Labor MP Andrew Leigh also wants to see the sector adequately regulated, saying banking regulator APRA should be the one who watches over them.
“In a severe financial downturn, there’s a risk that consumers who turn to ‘buy now, pay later’ products will find themselves in financial strife,” Mr Leigh argues.
“These are new technology platforms, but they present many of the old risks: that consumers take on more debt than they can afford.
“It’s critical that lenders are subject to the full force of the law, and that laws are updated if necessary, to protect the vulnerable.”
Afterpay says it makes most of its money out of merchants
But Afterpay’s Damian Kassabgi argues that, unlike credit card companies who rely on customers paying interest, Afterpay makes 85 per cent of its revenue from charging its 55,400 merchants fees.
Its merchants include big retailers such as David Jones, Big W and Chemist Warehouse in Australia to American Eagle and Levi’s in the United States.
The platform is also gaining hundreds of customers through eBay each day, and this growth is likely to accelerate given the company’s recent tie up with Qantas. The partnership allows people using Afterpay to accumulate frequent flyer points.
Afterpay does charge late fees and about 15 per cent of the company’s revenue comes from those.
This is down from 25 per cent back in 2018, when ASIC last reviewed the sector.
Afterpay says it is due to a number of reasons including a rise in repeat users.
For each order below $40, a maximum of one $10 late fee may be applied per order.
For each order of $40 or above, the total of the late fees that may be applied are capped at 25 per cent of the original order value or $68, whichever is less.
Afterpay has purchase limits, which can only increase once a customer establishes a consistent repayment track record.
The maximum amount per transaction is $1,500, while the outstanding account limit is up to $2,000.
This means, even those that fall behind are limited in the amount of debt they can rack up on Afterpay.
Mr Kassabgi argues the average credit card debt is about $3,500, whereas the average outstanding Afterpay balance is around $200.
“Our hardship levels at the moment have actually gone down from pre-COVID levels,” Mr Kassabgi says.
“The whole point of the system is to say you can only spend money if you can afford it.
“The idea is that if there is a single missed payment, an account is paused.”
Zip CEO says customers paid back more during COVID-19 crisis
Meanwhile, rival Zip Pay, which takes monthly repayments from customers, has 24,500 merchants and more than 2.1 million account holders.
Zip Pay is a bit different to Afterpay, in that it once you sign up and get approved, you’ll have a line of credit up to $1,000 and a shopping account.
Using the account and credit line, the customer can make purchases which they pay back in regular instalments.
Unlike Afterpay, ZipPay says they conduct formal ID and credit checks to decide whether the customer’s spending limit will be $250, $500 or $1,000.
But like Afterpay, Zip also charges certain fees. For every month there is a balance owing, the customer is hit with a $6 fee. Fail to cover that payment within 21 days and the customer is charged another $5.
Zip Co chief executive Larry Diamond says during COVID-19, customers “unsure of the future” are paying back more debt.
“At the onset of COVID, we did see a little uptick in hardship — we saw it definitely pick up in March and April, but plateau very, very quickly,” he observes.
But he says now fewer than 1,000 of its 2.1 million accountholders are under hardship arrangements.
“We’ve seen a large portion of customers paying back on time and in fact our early arrears, which indicates future losses, have come down over the last couple of months,” Mr Diamond says.
Is regulation is the sliver bullet?
Mr Kassabgi says ASIC could already intervene in the marketplace if it believed there was significant consumer detriment for any of these products.
“From our perspective, the regulations of the past aren’t the sliver bullet,” Mr Kassabgi said.
Mr Diamond’s preference is self-regulation under a voluntary code of practice that “will ensure minimum standards across the industry”.
“We think this is a great first step for the industry,” he said.
But Financial Counselling Australia’s Ms Guthrie says existing laws impacting other financial providers should impact ‘buy now, pay later’.
“The starting point is that buy now, pay later is credit, so if it’s a credit product it should be regulated like all the credit products.”
If the same regulation applies, ‘buy now, pay later’ operators would have to adhere to responsible lending laws, improve standards for managing complaints and reduce late fees if they are set too high.
Mr Brody noted there was no industry code of practice in force yet, and in any case, the banking royal commission had found self-regulation failed.
“What we need is robust standards and a regulator to enforce them,” Mr Brody argues.
The Reserve Bank is also worried vulnerable consumers could be taken advantage of through these schemes.
In October last year, it announced a review of the ‘no surcharge’ rules imposed by ‘buy now, pay later’ operators.
The ‘no surcharge’ rules restrict the ability of merchants to pass on the costs of providing these services to customers.
In contrast, debit and credit card providers cannot prevent merchants from adding a surcharge to cover payment costs.
The RBA’s review of the industry has been delayed by COVID-19, with a decision not expected until 2021.
IBISWorld senior industry analyst Yon Yeoh says “any change to this regulatory protection could drastically alter the existing business model of ‘buy now, pay later’ operators”.
Mr Brody fears merchants will inevitably pass on to consumers the high fees they are charged by ‘buy now, pay later’ companies.
“Of course, there’s a fee involved, it’s just not transparent to the consumer,” he says.
“The Reserve Bank proposed making those surcharges more transparent, like they’ve done with Mastercard and Visa. I think that’s appropriate.”