Buy-now-pay-later services are rapidly becoming the favourite payment method for young Australians, but proposed legislation changes could make 2020 the year they lose their lustre.
Since launching in 2015, Afterpay and its competitors (including Zip Pay and Sezzle) have grown immensely and are now used by more than two million Australian consumers.
Much of the growth in the buy-now-pay-later (BNPL) sector has come from younger consumers, who are turning away from credit cards in favour of the cheaper repayment plans on offer.
But all of that could soon change according to Peter Marshall, product data and compliance manager with consumer finance website Mozo.
Speaking to The New Daily, Mr Marshall said recent moves by government to bring BNPL services under the same laws that regulate other credit products could strip businesses like Afterpay of their competitive edge.
“[The reason] BNPL products aren’t covered by current credit regulations is their pricing structure – because they don’t charge interest on purchases, they’re not considered a credit product under the current regulations,” he said.
Over the past year, regulators have become increasingly concerned by that arrangement, as stories of consumers being stung by late fees or trapped with unmanageable debt start to emerge.
A report published by ASIC in late 2018 calculated the total debts owed to BNPL services at more than $900 million.
The regulator subsequently kicked off a review of the sector to see whether the National Credit Code should be applied.
If they say it should, Mr Marshall said consumers would benefit.
What that change would mean
If BNPL services are brought under the National Credit Act, consumers would need to be assessed in the same way they would when applying for a credit card or loan.
Providers would need to hire credit assessors to review each customer to establish how much they can reasonably repay within the allotted timeframe without causing hardship.
But a more robust application process wouldn’t be the only way such a change would affect consumers, Mr Marshall noted.
In order to fulfil these additional regulatory requirements, businesses like Afterpay would have to hire more staff and invest in technology – all of which comes at a cost.
And that cost will have to be passed on.
“If they were determined to be a credit product, then the reason for them not charging interest would go away – so there would likely be an interest rate attached to the product in much the same way as a credit card,” Mr Marshall said.
The very thing that makes them unique may not actually be viable.’’
A possible alternative to this conundrum would be for BNPL providers to pass the costs to retailers, but this too presents a problem for consumers.
Many of these services already charge a merchant fee, but include clauses in their contracts preventing retailers adding a surcharge to cover that cost.
Instead, retailers either squeeze their margins or increase their prices across the board, meaning “the price of people accessing those services get passed on to all consumers”, not just those using BNPL services.
In November, the Reserve Bank of Australia announced a review of these arrangements, potentially paving the way for retailers to add a surcharge on BNPL payments.