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Tony, Michael and David Partners at ABKJ
ABKJ Lawyers

How Does Afterpay Make Money?

The convenience and flexibility of split-payment arrangements are very enticing for many Australian shoppers. “Buy now, pay later” services such as Afterpay, ZipMoney and Ourpay offer retail consumers the ability to take home items instantly and pay them off in four fortnightly, interest-free instalments.

Over the past three years since its launch, the popularity of Afterpay has continuously grown exponentially. More than 10,000 retailers offer Afterpay in-store and/or online, and over 2.3 million Australians have used the platform during a transaction. Recently, Afterpay has expanded from solely servicing the retail market, with airlines such as Jetstar now allowing customers to purchase airline tickets using the platform.

How Does Afterpay Work?

The platform is largely popular for its facilitation of purchases that consumers may otherwise not be able to make in a one-off transaction. For example, the upfront cost of a $300.00 coffee machine may be unfeasible for a person, but that same person may be able to afford more digestible interest-free payments of $75.00 every fortnight until the total cost of the machine has been paid off. This gradual payment system, dubbed by many as ‘modern-day layby’ – combined with the absence of any interest/user fees, creates an attractive product for consumers. However, this convenience does not come without risks. This new financial service is not covered by the National Credit Code, and does not fit neatly within the financial sector as defined by banks and traditional credit providers. As a result, it is unregulated – at the risk of consumers.

Afterpay’s Profit & Risk

Last financial year, Afterpay’s income generated from late fees surged 365% to $28.4 million. Whilst the bulk of Afterpay’s profit comes from merchant fees (that is, Afterpay charges retailers on transactions where the platform is used), approximately one-quarter of its profit was generated through fees charged to consumers who failed to make a payment. In addition to late payment fees (which can reach up to $68.00 per transaction, depending on how late the payments are, and how many are missed) is the more concerning aspect of credit reporting. In a 2017 survey of Afterpay consumers, 36% were unaware that their activity could impact their credit rating. It’s right there in the fine print – “… Afterpay reserves the right to report any negative activity on your Afterpay Account (including late payments, missed payments, defaults or chargebacks) to credit reporting agencies.” Credit ratings are important tools used by banks and other financial institutions in assessing a person’s ability to honour financial commitments based on their transactional history. A poor credit rating could disadvantage a mortgage, credit card or other important commercial application.

The practical implications of “buy now, pay later” services operating without regulation is that consumer protections are not enshrined in any legislation. This means that in many cases, consumers may be at a disadvantage in the event of a dispute with the service. With respect to traditional financial services, the National Consumer Credit Protection Act 2009 provides guidelines such as the requirement of a licence, membership to an external dispute resolution body and the adherence to responsible lending principles.

In October 2018, the Australian Senate agreed to launch an inquiry into unregulated debt-management firms and unlicensed financial services providers, such as Afterpay. Speaking to ABC on the inquiry, Consumer Action Law Centre chief executive Gary Brodie said, “This Senate inquiry is an important initiative and will expose those financial-services providers that have been left free to prey on financially struggling Australians for too long.”

In the midst of the busiest shopping period of the year, consumers are urged to consider the risks and potential consequences of credit products such as Afterpay. Its convenience is undeniable, but its potential impacts on unwitting users’ financial position and rating are worth noting.

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