Chapter 5
Buy now pay later
Market participants and products
5.1
Buy now pay later products are relatively new to the market. They allow
a consumer to buy and receive goods and services immediately, but pay for them
over a specified period. The industry has expanded rapidly recently. The number
of consumers using these products increased from 400,000 to approximately two
million between 2015 and 2018.[1]
Good Shepherd Microfinance estimates that 30 per cent of applicants for their
microfinance loans are repaying such a debt.[2]
5.2
The newness of the industry is shown by ASIC's finding that 70 per cent
of users said they used a buy now pay later arrangement for the first time in
the last 12 months. Users tend to be young: 60 per cent are 18–34 years
old. There were more female than male users.[3]
5.3
Buy now pay later companies employ a variety of business models.
5.4
One of the fastest growing companies, Afterpay, refers to its product as
a 'budgeting tool', and specifically states that it is not a line of credit. It
does not charge interest or account keeping fees. It charges merchants for the
use of the service, and it levies late fees. It says that the late fees are
capped, and are, in fact, less than the cost to the company of late payments.
Most of its revenue is from merchant fees.[4]
5.5
Zip Pay similarly does not charge interest. It does charge an account
keeping fee. It notes that its business model and market are very different
from those of small amount credit contract (SACC) providers, and that it
'...absolutely [does] not target consumers at risk of financial hardship'.[5]
ZipMoney is quoted as having 800,000 clients and conducting two million
transactions last year.[6]
5.6
Flexigroup, the parent company of buy now pay later product Certegy Ezi‑Pay,
said that for Certegy, 63 per cent of revenue comes from merchant fee income,
while less than two per cent was from late or default fees. Certegy deals with
bigger transactions than the other buy now pay later operators: almost half of
its revenue is from sales of solar panels or other home improvements.[7]
5.7
Buy now pay later schemes are seen as an alternative to credit cards by
young consumers:
...there has been a huge amount of coverage of credit, and the
dangers of credit, over the last 10 years as well, so there's a kind of slowing
down of the normalising of credit. Ultimately, people still want to consume and
so they're looking for alternative ways to consume.
...It's just that, for younger people, it's part of their
experience; they're more familiar with it; it makes more sense to them than,
say, a line of credit or a credit card.[8]
5.8
The National Online Retailers Association (NORA) sees these schemes as
an improvement on the traditional 'layby' model. They offer huge benefits to
the industry, particularly through the reduction or absorption of Card Not
Present fraud—which is possible when buyers give credit card details, for
example online or by phone or email, and do not present their card.[9]
The industry sees such innovation as crucial in delivering greater financial
control and easing cost-of-living pressures for consumers over the long term.[10]
5.9
The companies use modern technology to provide a service that is easy to
use and fast. Zip.co and Afterpay both spoke about their algorithms, which
enable them to investigate consumers' financial circumstances and test their
eligibility for funds:
We're able to provide an automatic result based on our
analysis of all of those data points that I touched on. Our algorithm is
assessing that information in real-time and, in fact, we're actually consuming more
data than a traditional credit provider would for an application of a credit
card or home loan.[11]
5.10
ASIC agreed that this could work:
...because the responsible lending obligations are about the
particular consumer who's applying for credit, it is possible, through
technology, for a credit provider to use technology to obtain information about
that consumer, whether that's bank account transaction information or other
information that's available electronically, and feed that information into an
algorithm in order to make a lending decision, so long as the information is
about that consumer and is relevant to the lending decision and the credit
provider's taken reasonable steps to obtain the relevant information. So, yes,
it is possible for algorithms to form part of decision processes that lenders
use...[12]
5.11
But Mr Paul Holmes of Legal Aid Queensland was sceptical of such
automation of judgements:
I can't speak for the buy-now pay-later algorithm yet, but my
experience of the payday lending industry is they've been using algorithms to
interrogate data and assess debt for a number of years now, and it hasn't
improved their ability to lend responsibly or lend appropriately. So I'm
personally going to take a bit of convincing that just having a fancy algorithm
is enough to assess the individual circumstances of an individual person...[13]
Credit or not credit?
5.12
There was some debate about whether buy now pay later schemes are a form
of credit. They do not charge interest to the customer, which is an element of
the definition of credit under the National Credit Act. They are different from
credit cards, which provide a source of funds for unspecified purposes. Each
debt is applied to a specific product, which is provided directly to the customer
at the time of purchase. Buy now pay later companies pay the merchant the
advertised cost of the product and the customer pays the product off in a
series of instalments with no interest incurred.
5.13
ASIC was equivocal about whether they are a form of credit. They do not
meet the definition under the National Credit Act, but they are credit as
defined in the ASIC Act:
If you're thinking of credit in the ordinary everyday
understanding of what credit is, then we would say it is a form of credit
because it enables consumers to pay for goods over time and, by postponing the
payment of goods, you're effectively being given a form of credit in the
ordinary sense of the word.[14]
5.14
Buy now pay later companies were also divided. Zip.co said:
We
wholeheartedly support ASIC's position that buy now pay later is a form of
credit...[15]
5.15
However, Afterpay said:
We've never been defined as credit when it comes to the
national credit code nor do we rely on an exemption as confirmed by ASIC. We
never charge interest.[16]
5.16
Good Shepherd Microfinance was impatient of the fine points of debate,
and believed that buy now pay later is a form of credit:
...a business lets you buy
something without paying for it immediately, it sends you a payment schedule listing payment amounts and due dates.
It then advises you that it'll charge you a late fee if a payment's missed and
ultimately, if required, passes it on to their collection agency. To the
average Australian that is a credit product and, as such, should be treated as
one.[17]
Impact on consumers
5.17
The ASIC study of buy now pay later products reported that users found
that the products allowed them to spend more than they otherwise would and to
buy things they otherwise might not have. It expressed concern that these
products may pose a risk of overcommitment to some consumers and sometimes
cause inflated prices for consumer goods. It noted that one in six consumers
reported difficulty in meeting payments. It pointed out that there was a
particular danger in the 23 per cent of cases where consumers used credit cards
to pay these debts, thus incurring substantial interest charges. It noted that
over 40 per cent of users had incomes of under $40,000, and of this group, almost
40 per cent were either students or in part-time work.[18]
5.18
Many submissions refer to cases of consumers who have got into trouble
with multiple buy now pay later contracts, often having multiple contracts or
using these contracts alongside other SACCs.[19]
Good Shepherd Microfinance reported that the majority of applicants for microfinance
have multiple buy now pay later accounts with various providers (along with
SACCs).[20]
An extreme example was:
One loan applicant recently provided us with a 90 day bank
statement containing 288 buy-now pay-later transactions totalling $5,600. This case
study demonstrates the large amount of credit that can be accessed with no
verification of income, credit check or assessment of capacity to repay.[21]
5.19
Care Inc reported that it was seeing an increase in the number of
clients with more than one buy now pay later debt who were struggling to make
repayments:
The scheme encourages people with limited financial capacity
to purchase goods that they cannot afford upfront, increasing the likelihood of
future financial stress.[22]
5.20
Buy now pay later products are also emerging as a cause of insolvency:
And obviously buy now, pay later schemes are an emerging
issue with some kind of buy now, pay later funding present in more than 20 per
cent of insolvencies.[23]
5.21
The provider companies insist that they take a lot of care to ensure
that consumers do not overcommit themselves:
In fact, we refuse 30 per cent of purchasers and 50 per cent
of first-time purchasers based on our algorithms and consumers' history. Be
late one payment, we suspend your account and you can't buy anything else
through Afterpay until you've come good.[24]
5.22
They point out that the rate of customers having negative effects from
buy now pay later commitments (one in six) is similar to the rate in the credit
card sector.[25]
5.23
Mr Paul Holmes from Queensland Legal Aid pointed out that there may be
an artificial lowering of the reported defaults under buy now pay later
schemes. Because it is not regulated as credit it does not have hardship
provisions. A customer who has multiple credit products is likely to seek the hardship
provisions of other products, and pay the buy now pay later account first:
So what you end up having is a cost shifting of the hardship...part
of the reason the default rates are very low is people are paying that first
and often...[because] they've got hardship over here from these other regulated
products.[26]
5.24
Dr Paul Harrison pointed out that the newness of the product and the
ease of access was attracting young people:
This new form...of offering money to people is very new to
everybody...There are public social norms now around: 'Avoid credit,' whereas
there is not a lot going on about: 'Avoid getting into difficulty with a
buy-now-pay-later type of approach.'... It's also more difficult to get credit...So,
for a young person who has not got a strong credit rating or who hasn't had a
lot of experience with credit, this is much easier to transact.[27]
Conduct of providers
5.25
There were questions raised about the companies' insistence that their
algorithms prevented overcommitment by consumers and the evidence from a number
of other sources of very many consumers with multiple buy now pay later debts
which they could not service, often in conjunction with other credit products.
Clearly, more needs to be done to ensure consumers are protected, and company
algorithms alone are not sufficient.
5.26
Criticisms of the behaviour of individual providers of buy now pay later
were relatively rare. There was more concern about the nature of the product:
in particular, that it allowed people to consume on impulse.
5.27
Dr Paul Harrison's analysis of consumer decision making is discussed in Chapter
3. He emphasised that 'the goal is to get consumers to make the decision as
quickly as possible'. In recent years shopping has gone on line, and the
technology has been speeded up.[28]
5.28
Further, with buy now pay later, the purchase and the paying for it have
been bundled into one product to ensure the impulse is acted on immediately:
...there's a halo effect that occurs when...consumers see a
product that they want to buy and see the ease with which [they're] able to get
credit or some kind of financial assistance in that moment.
5.29
Consumers in such situations do not stop and think that there are two
different products and one might be better purchased elsewhere.[29]
5.30
While consumers are responsible for their own behaviour, when problems
are widespread it is necessary to look for systemic causes. In particular, the
targeting of buy now pay later products to young people does raise some
questions:
I think we are seeing too much evidence in our applications
to suggest that many consumers are actually already vulnerable by the time
we're seeing them. I agree. The borrower does have some responsibility but when
the borrower is 18 and trying to pay rent, are they capable of making those
decisions which have potentially a decade's worth of impact?[30]
Nature and adequacy of the current regulatory arrangements
Current regulation
5.31
Representatives of ASIC explained current regulation:
Buy now pay later products are generally not credit under the
National Consumer Credit Protection Act because that Act defines consumer
credit in a particular way and has exemptions for arrangements that meet
certain criteria. Buy-now pay later-products generally fall within the
exemptions that exist in that piece of legislation. However, buy now pay later
products are credit as defined in the ASIC Act, and the ASIC Act contains the
general consumer protection provisions that exist, including prohibitions
against misleading or deceptive conduct and unconscionable conduct.[31]
5.32
ASIC noted that because they are not subject to the responsible lending
obligations, buy now pay later operators are not required to consider the
income or existing debts of customers. This means that they can offer finance
to consumers who cannot afford to repay; and that a consumer who is in default
can still get credit from another provider.[32]
5.33
AFCA pointed out the same anomaly:
Responsible lending laws do not apply to these arrangements,
and this, we believe, does cause real difficulty. We believe that some form of
affordability assessment should be undertaken and consumers of these services
should have the ability, as many other consumers do, to bring matters to us as
the ombudsman if they feel that they've been treated unfairly.[33]
5.34
Choice also noted that a quarter of Afterpay's income in the last
financial year was from late fees, and suggested that such lenders should be
subject to responsible lending obligations.[34]
Changes under way
5.35
The legislation providing for Treasury Laws Amendment (Design and
Distribution Obligations and Product Intervention Powers) Bill 2018 is
currently before the Parliament. ASIC argues for the extension of the product
intervention power to the buy now pay later sector, rather than bringing the
sector into the National Credit Act. Representative of ASIC commented:
We think that the extension of product intervention powers to
this sector will enable us to intervene and require things to be done in a much
more targeted and more effective way because it will allow us to address the
potential consumer harm more directly...[35]
5.36
It would also be flexible:
The product intervention power, as currently drafted, would allow...an
entity-specific intervention, where it was just that entity with their product
that was the issue. But, if the problem was sector wide or even a broader group
that's still not sector wide but a broader group, the intervention can be on
that broader basis.[36]
5.37
Treasury noted that the bill was structured to allow further products to
be brought in easily.[37]
5.38
The government has also introduced amendments to the Competition and
Consumer Act 2010 which would create a consumer data right and will enable
sellers of credit products to check the indebtedness of applicants for credit.
This was welcomed by the industry.[38]
Other proposed changes
5.39
The Consumer Action Law Centre and Choice called for buy now, pay later
providers to be brought into the scope of the National Credit Act.[39]
Mr Paul Holmes of Legal Aid Queensland agreed:
...all of these products should be treated in the same way,
because they have the ability to have the same adverse impact.[40]
5.40
Zip.co called for:
...a sector-specific regulatory regime centred on three key
pillars around responsibility, transparency and customer support: one, where we
see minimum standards for up-front due diligence to ensure customers can afford
the repayments; two, that customers understand what they are signing up for;
and, three, that hardship safeguards are in place to help customers should
their financial circumstances change.[41]
5.41
This would be close to, but not identical with, coverage under the
National Credit Act:
It's very close to full, responsible lending compliance. I
think our view of regulation for the sector should be fit for purpose for the
products it's regulating, so we would advocate for a scaled-down version of
responsible lending. In fact, we would advocate income verification and caps on
the amount of repayment that it could take up of a consumer's income.[42]
5.42
Afterpay also did not want the industry to come under the National
Credit Act, and instead supports the extension of the product intervention
power:
...it is easier to regulate Afterpay like traditional credit
products, but that is a blunt and simple solution to a more complex issue—and
one that risks stifling innovation...traditional protections and traditional
regulation does not deliver positive customer outcomes...Afterpay has publicly
supported reforms that would see ASIC's intervention powers extend to cover the
buy‑now pay-later sector and create a regulatory framework for different
business models within the same industry...
In addition to this...we would seek
[regulation] so we can better share information around positive and negative
behaviours of our users and understand when people are using multiple products
and appropriately.[43]
5.43
However, Zip.co asserted that compliance with the National Credit Act:
...would have a very minimal impact on our day-to-day
operation. We're already undertaking the majority of the things we would need
to do to comply with the National Credit Code.[44]
5.44
Certegy would be affected if the SACC cap were to be imposed on buy now
pay later products, because it tended to fund more expensive products:
Yes. I don't necessarily think that limiting a cap on the
amount that can be borrowed will address the concerns that are raised
throughout the committee. In particular, again, the fit-for-purpose nature of
this product is for consumers who would like to buy items for their home or
essential items and choose a product that assists with their budgeting
arrangements, instead of putting that particular purchase on a credit card.[45]
5.45
Dr Paul Harrison argued that slowing down the process of online
purchasing and paying was important. He did not believe a cooling down
requirement would work, because that took effect only after the decision had
been made and acted on. Rather, he advocated regulation requiring a 'double
opt-in', where the consumer had to make two decisions, separated in time.[46]
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