Among other things, 2020 has been the year of e-commerce, and, by extension, it’s become the year of buy-now-pay-later too.
Aussie market leader Afterpay has seen its share price top $100, up from $8.90 in mid-March. Competitor Zip Pay has also been going gangbusters on the ASX, and newer players like Payright and Limepay are reaping the benefits of a mass shift online.
Such products essentially extend short-term credit to consumers, allowing them to take on a small debt and spread their payments into more manageable chunks.
We’re also seeing other alternative credit solutions appearing. Last week, fintech BeforePay raised $4 million for its product allowing users to borrow up to $200 from their pay cheque in advance. BeforePay charges a flat 5% fee, for short-term loans, often over just seven or 14 days.
SmartCompany’s reporting on Beforepay generated lively discussion in the Sydney Startups Facebook group, with some commenters questioning the ethics of such a product and suggesting the BNPL trend has gone too far.
Some called it a debt trap for the vulnerable — essentially a payday loan — while others pointed to the demand in the market; Beforepay launched in early-2020, and now has more than 100,000 users.
Fintechs like this are providing credit in a way traditional institutions can’t. But are they improving the lives of consumers, or simply taking advantage of a broken banking system for their own gain?
Last week, the Australian Securities and Investments Commission (ASIC) released a report into the industry, finding 21% of users had missed payments within the past 12 months.
More concerning, 20% said they had cut back, or gone without, essentials — even skipping meals or paying bills late — in order to make their BNPL payments on time.
“When normalised, these services are some of the most expensive credit products in the market,” Luke Campbell, co-founder of financial wellbeing app Pineapple tells SmartCompany.
The big problem with ‘traditional’ payday loan products is the debt spiral they can lead to, he explains, as users “take credit and need more credit to pay that credit back”.
Products like Beforepay are “marginally better”, Campbell says, but the main issue is the price, which he sees as excessive.
Beforepay co-founder and chief Tarek Ayoub stresses the startup doesn’t have any ‘hidden’ fees, and says the amount anyone can borrow is capped at $200, which must be repaid before another loan can be taken. New users are limited to loans of $50 or $100, based on their income and spending history.
“The idea is for this to be a convenient way to access pay without being shackled to an arbitrary employer-determined pay cycle,” Ayoub says.
Campbell says some alternative credit products operate more responsibly than others, and compared to credit cards, “some providers are a much more economically smart product”.
But one thing that tends to come up in the social media comments section is the different approaches to credit checks.
There is concern the people using such services — particularly young people, who are more likely to miss repayments — might be compromising their credit history for the future.
Zip Pay’s website, for example, says it ‘may’ run a credit check on anyone who applies for an account to confirm they are able to make repayments.
If it does, that will show up on the consumers’ credit history in the future, Campbell explains, simply showing they’ve made an inquiry.
“One check on Zip isn’t going to destroy your credit file,” he says, but 10 or 15 checks might.
Afterpay’s terms and conditions also note it reserves the right to order a credit report on a user, however, it’s not a prerequisite for opening an account and it doesn’t appear to be standard procedure.
Beforepay says it has its own assessment criteria, which is based on users’ historic spending behaviour and takes into account income and expenses. Ayoub claims using the service won’t affect a user’s credit score.
However, while paying off a credit card every month can improve the user’s credit score, making BNPL repayments won’t.
“That could also make it harder for people down the line to get access to credit,” Campbell says.
To regulate or not to regulate?
Any financial product comes with risks, but as BNPL and pay-on-demand products are so easy to access, users don’t necessarily consider them.
The question is: where does the responsibility lie?
Speaking to SmartCompany, Saurav Dutta, head of the School of Accounting at Curtin University, says you could say the same about almost anything.
Take sugary foods, for example. A little is okay, but if your entire diet is sugar-based, things get dangerous.
“Should a sugar provider provide a warning on their product?”, Dutta asks.
“The main thing it comes down to is, do they have sufficient exposure with the product that makes the consumers aware of the risks?
“If they do, there’s nothing much you can do.”
This brings us to the issue of fine print. If a BNPL provider explains the risks within pages of terms and conditions that are skim read at best, is that really full disclosure?
“They have the choice of how obvious to make it,” says Dutta, who argues there’s a role for the regulator in educating consumers, if it’s not actively regulating.
“We cannot just rely on the company”.
Yet, that’s exactly what’s been happening. The Australian Finance Industry Association is working on a code of conduct, due for release next year, that would see BNPL and other credit providers self-regulate.
Self-regulation works when there’s a lot of competition, and where consumers have high financial literacy, says Dutta. He’s not convinced the Australian BNPL space fits the bill.
Pineapple co-founder Kari Marsden disagrees, arguing a one-size-fits-all approach won’t necessarily work.
“Sometimes, really well-intended regulation can actually result in poor outcomes for customers, because of the complexity or the openness to interpretation,” she suggests.
Self-regulation is a “bold play”, she says, but it will allow the industry to continue to mature, setting up fintechs as legitimate competitors to traditional finance and shifting the balance of power “that the big-four banks have held for far too long”.
Just because you can, doesn’t mean you should
Even if they skirt around regulation, BNPL and other alternative credit solutions are clearly operating within the bounds of the law to meet growing consumer demand.
But online debate has been dominated by questions about ethics. Just because you can, should you?
Ethics is “a pretty touchy subject”, Dutta says.
Business is business — the goal of these companies to generate revenue and profits for themselves, or for their shareholders. They’re not there to educate.
“But, is it ethical to take advantage of somebody’s stupidity?” he asks.
“I’m not so sure.”
Still, keeping customers happy is key to growth, and Marsden says the BNPL providers that are thinking long-term will understand the importance of earning, and keeping, the trust of users.
“There are examples of where things go wrong,” she says.
“But, ultimately, options, choices, and innovation outside of the big banks will lead to better outcomes.”