The spectre of regulatory intervention in the fastest-growing area of fintech – ‘buy now pay later’ payments – has created plenty of volatility this year for the likes of Afterpay and Zip. Investors have taken a dim view of the turmoil: Afterpay narrowly missed a strike on its remuneration report at last week’s annual general meeting.
But that wasn’t the only bullet it dodged. A highly-anticipated report from the Australian Securities and Investments Commission said the National Credit Code would not be extended to the sector (Afterpay, Zip, Openpay, Oxipay, Brighte and Certegy Ezi-Pay). This triggered a relief rally: Afterpay shares rose 27 per cent last week; Zip’s were up 12.5 per cent.
But ASIC’s verdict that responsible lending laws do not need to be extended to the fast-growing sector doesn’t mean providers have avoided the need to better understand their customers.
ASIC also said it wants to use a new ‘product intervention power’ (if extended by the Parliament) to influence the point of sale products should they start to create problems for vulnerable customers.
And as economic stress grows, the pool of vulnerable customers is set to increase. There were 1.9 million ‘buy now pay later’ transactions in the month of June this year, up from 50,000 a month two years ago. Over the last year, the number of active users for these six companies has doubled to 2 million.
Outstanding debt has doubled over in two years to $903 million. Retailers are encouraging the growth so they can sell more goods.
ASIC’s report contains three key warnings which are also relevant to the fintech sector more broadly. These will be in focus as an Labor-initiated Senate inquiry examines practices in the sector.
The first is that contracts must comply with the government’s unfair contracts terms laws. Second, merchants cannot inflate the cost of the underlying products if buy now pay later is chosen as the payment method.
The third – and most significant – risk is the growing use of multiple buy now pay later accounts by vulnerable customers.
ASIC said its consumer research showed 30 per cent of buy now pay later users have used more than one provider. Two case studies in the report pointed to Afterpay borrowers running up big debts when they were already bogged down with other buy now pay later loans, payday loans, or other consumer loans.
After the royal commission, banks are on notice they must conduct more thorough checking of borrower income and expenses before lending. In the buy now pay later sector, the level of checking varies significantly. ASIC said Afterpay only examines previous repayment history with Afterpay itself.
Open banking could let Afterpay improve. For example, it could require new customers authorise it to tap into their transaction accounts to work out if they have other buy now pay later accounts and debts.
ASIC’s report recognises the potential for these fintechs to encourage ‘responsible spending’ – at least when compared to credit cards, the product against which they compete.
Credit cards contemplate multiple advancements of credit. Customers are encouraged to build up big limits, on which big interest rates are charged, in addition to fees.
ASIC criticised credit cards in a separate, recent report. In contrast, Afterpay told the ASX last week it “does not allow a consumer to make another purchase if a single payment is late”.
ASIC’s report last week also provided an insight into Millennial spending psychology. Many users of buy now pay later services, who are typically younger and on lower-incomes, are using them to smooth repayments on big items, so they can meet regulator commitments like rent.
But the report also suggests improvement is required to fend off the regulatory threat. ASIC applauded providers’ policies for financial hardship and membership of the new Australian Financial Complaints Authority. But more work is needed to show they more fully understand the profile of vulnerable customers. This will increase costs, but open banking will make it cheaper than it would have been.