Australia’s two largest buy-now-pay-later providers, Afterpay and Zip Co, faced an at times confused grilling yesterday during a Senate hearing evaluating whether the fast-growing sector should be more tightly regulated.
Afterpay co-founders Nick Molnar and Anthony Eisen found themselves explaining basic elements of their business model to senators on Tuesday morning, while Zip Co chief executive Larry Diamond repeatedly clarified the differences between the business models of both companies.
Both companies put forward their arguments that buy-now-pay-later products should not be made to fall under national consumer credit protections and should instead be regulated in a way that recognises their difference to credit-card providers and one another.
If national consumer credit protections are extended, buy-now-pay-later operators would be forced to conduct the same credit checks banks do when issuing credit cards. This could have a significant effect on the industry and the businesses increasingly relying on the services for sales.
The two companies traded veiled barbs at each other on Tuesday, with Molnar critical of buy-now-pay-later providers who make their money from customers, rather than merchants.
“We are not a traditional credit product or a payday lender,” Molnar told the hearing.
“The opposite is true for the traditional credit products and unfortunately some buy-now-pay-later services were built on the foundations of traditional credit models.”
Afterpay and Zip Co have very different business models. Afterpay splits payments for eligible goods and services into four equal parts, with repayments made bi-weekly.
Zip Co provides a credit line to customers and conducts credit, bank statement and ID checks. This credit can then be used to purchase products, with repayments made afterwards.
Zip Co has sought to distance itself from Afterpay in recent months amid speculation about the Senate inquiry, embracing its status as a credit provider and spruiking the checks it conducts on customers.
Neither Zip Pay or Afterpay charge interest, but Zip Co has a separate product, Zip Money, with a purchase limit up to $30,000 that includes interest charges.
Afterpay makes about 20% of its revenue from customers in the form of late fees, drawing the rest from merchant fees. Zip Co makes more than half its revenue from customer fees but has much lower merchant fees.
Senators concerned with consumer welfare
Questions from senators honed in on a recent finding by ASIC that one-in-six buy-now-pay-later users have either become overdrawn, delayed bill payments or borrowed additional money to meet their payments.
There is concern that some consumers, who are likely young people, are being sucked into excessive consumerism, enabled by buy-now-pay-later services, and are subsequently struggling to pay their bills.
Both Afterpay and Zip Co were yesterday adamant that customers who can’t afford to use their service shouldn’t be on their platforms, detailing financial hardship measures they take to assist customers in distress.
Zip Co said only 1% of its customers struggle to make their repayments, while Afterpay said in the last financial year 95% of its payments didn’t incur a late fee.
While Zip Co and Afterpay are the two largest providers, others such as Certegy Ezipay, Oxipay, BrightePay and Openpay have also been examined by ASIC recently. Representatives from these companies have yet to appear before the Senate.
Afterpay is undoubtedly the largest provider though, having already partnered with over 20,000 businesses. Many retailers SmartCompany has spoken to in the last few weeks say the service was popular with customers over Christmas.
However, there is concern among merchants about Afterpay’s role in unsustainable consumerism among millennials and whether regulatory scrutiny could backfire back onto them.
“It bothers me, I think they [Afterpay] have got away with a lot,” Judith Treanor, founder of ethical gift retailer Temples and Markets, tells SmartCompany.
“Looking at these Facebook groups you see there’s a lot of people who just spend, spend spend.
“They’re just buying because it’s so cheap, they don’t know they’ll get into debt.”
There’s little doubt buy-now-pay-later is popular. Recent research conducted into the sector by Power Retail found the market has reached “critical mass” in Australia, with 1.8 million users and a growth rate of 120% per annum.
However, ASIC found consumers owed $903 million to providers as of June 30, 2018, prompting senators at the hearing to question whether better measures to protect consumers need to be taken.
Bank-like checks would “diminish” Afterpay
Diamond said Zip Co is already compliant with the majority of the credit protections, but Molnar, who repeatedly clarified Afterpay does not provide credit, said an extension of national credit protections to cover buy-now-pay-later would “diminish” several areas of the business.
“To trawl through customers’ bank account details, employment history and other aspects which are reticent within the national consumer credit protection in terms of those policies and procedures is probably disproportionate,” Eisen told the hearing.
Zip Co took a slightly different view to Afterpay, advocating for some form of responsible-lending obligation on the sector which could include income checks and caps on fees.
“We wholeheartedly support ASIC’s position that BNPL [buy-now-pay-later] is a form of credit and we believe anyone that issues credit has a duty of care to ensure it is placed in the right hands,” Diamond said.
“We believe this committee should explore a sector-specific regulatory regime.”
Both Afterpay and Zip Co support legislation currently before parliament which would extend ASIC’s product intervention powers to cover buy-now-pay-later providers.
Molnar said Afterpay conducts a wide range of tests on its own customers, but would not go into detail about the company’s process, citing commercial sensitivity.
Afterpay did, however, agree to table their customer check process in confidence, saying it leads to lower default rates than the traditional credit-card industry.
Buy later, pay later?
Interestingly, both Zip Co and Afterpay confirmed that they don’t sell off bad debt or report it to credit agencies.
Zip Co does not use third-party debt-collection agencies and doesn’t enforce debt legally, while Afterpay does use debt collection but said it’s never taken anyone to court.
There were also some pretty wild ideas about how to minimise consumer harm in the sector yesterday. Paul Harrison, a consumer behaviour researcher at Deakin University, advocated a “double opt-in” process.
Harrison said to the extent that customer detriment exists in the buy-now-pay-later space, it could be resolved, at least in part, by slowing down the buying process to tackle its impulsive nature.
A double-opt-in process would require customers to re-confirm they wanted to use a buy-now-pay-later service 24 or 48 hours after they had initially signed on to purchase a product.
This would, however, fundamentally change the way the industry works.
“It’s not buy now, it’s buy later,” Harrison quipped.