When Matt Jackson, 30, started eyeing off a $600 denim jacket online, it was Afterpay that convinced him to make the purchase. â€œThereâ€™s just no way I would have bought that outright,â€ he admits. â€œBut spreading it out somehow made it feel like it wasnâ€™t as expensive.â€
This is the simple but seductive psychology â€œbuy now pay laterâ€ services use to attract customers. Companies such as Afterpay (and its competitors zipPay and Ezi-Pay) allow users to avoid paying upfront for purchases â€“ like clothes, flights or beauty treatments â€“ and instead divide the cost across fortnightly deductions. With a few clicks, a $600 jacket becomes four payments of $150.
Itâ€™s a concept thatâ€™s proven wildly successful in Australia. An Asic report found that in the 2017-18 financial year, 2 million consumers â€“ or 10% of the adult population â€“ used a buy now pay later service. Afterpay alone reported global sales of $5.2bn last financial year, a 140% increase from the previous period.
Last week another competitor, Klarna, entered the Australian market. A Swedish company, Klarna is Europeâ€™s most valuable fintech firm and has arrived in Australia in partnership with Commonwealth Bank.
While Afterpay can be used only at retailers it has a partnership with, Klarna allows its users to shop anywhere online, meaning the buy now pay later model can be applied to any product or service with a URL â€“ even to order pizza.
Buy now pay later is booming, but financial bodies warn that the industry is under-regulated.
â€œItâ€™s like the wild west,â€ says Julia Davis, of the Financial Rights Legal Centre. Because companies like Afterpay donâ€™t charge interest on purchases â€“ just late fees if users fail to pay on time â€“ they arenâ€™t required to screen applicants the way traditional credit companies are, or subject to the same level of government scrutiny.
â€œThey donâ€™t need to check that you can actually afford to pay back these debts before they give you the credit,â€ Davis says. â€œThey squeeze into a loophole in the law â€“ theyâ€™re not considered a credit provider, so they donâ€™t need a licence. But theyâ€™re certainly encouraging people to spend money they donâ€™t have. Even if itâ€™s not considered credit under the law, itâ€™s absolutely a debt.
â€œIâ€™m not trying to say buy now pay later is an evil product, itâ€™s just a new product. And itâ€™s not licensed.â€
Afterpay doesnâ€™t run credit checks on applicants (though Klarna says it will). Instead, prospective customers need only be over 18 and have a verifiable email address and phone number, as well as a valid Australian bankcard. Afterpay is confident in their methods â€“ the company says 95% of its payments donâ€™t incur a late fee.
But Davis has seen people with no income and no ability to repay their purchases be approved for buy now pay later services. She says some customers have multiple accounts across different providers, making their debts hard to keep track of. The Financial Rights Legal Centre is currently working with a woman, in debt for 35 different purchases made with a buy now pay later service, who was able to keep shopping long after she should have been cut off.
Asicâ€™s 2018 report found that one in six users believed theyâ€™d experienced a negative impact â€“ like becoming overdrawn, delaying bill payments or having to borrow money from family or friends â€“ because of a buy now pay later arrangement. They also report that 44% of users have incomes of less than $40,000.
Most of the industryâ€™s customers have one thing in common: theyâ€™re young. In 2018 ASIC found that 60% of buy now pay later users were aged between 18 and 34, while Afterpay says their average customer age is 33. Itâ€™s no coincidence that buy now pay later appeals to millennials â€“ the model was designed to tap into the generational swing away from credit cards.
Nick Molnar, Afterpayâ€™s now 29-year-old founder, once described millennials as â€œmore afraid of credit card debt than they are of dyingâ€. He knew that his cohort had come of age during the 2008 financial crisis and didnâ€™t trust banking institutions the way their parents did â€“ but that they still liked to shop.
â€œThatâ€™s the appeal of something like Afterpay: although itâ€™s quite a big company now, it doesnâ€™t have the stigma attached to a large credit card company,â€ says Raymond Da Silva Rosa, a finance professor at the University of Western Australia.
Likewise, Julia Davis says that young people donâ€™t trust â€“ or want â€“ credit cards, and that buy now pay later is â€œreplacingâ€ what Visa or Mastercard was for young people 15 years ago. She also notes that millennial aversion to credit cards is pushing us towards even more dangerous forms of financing, such as online payday loans.
Generally, Da Silva Rosa believes that buy now pay later services are â€œless risky as a wholeâ€ than credit cards, partly because their loan limits are much lower â€“ Afterpayâ€™s current cap is $2,000, a sum reached only after the user has demonstrated their ability to repay on time.
A spokesperson from Afterpay told Guardian Australia that they automatically froze the account of any customer who was late on payments. â€œ[They] cannot purchase anything else, and cannot revolve in debt, nor can they kick it down the road to another credit provider. This is the complete opposite of what a credit company wants, as the more a customer goes late, the more they can make in interest.â€
But that doesnâ€™t mean they arenâ€™t profiting off failures to repay â€“ Asicâ€™s report found that 25% of the companyâ€™s income in financial year 2017-18 came from late fees, though the bulk of their profit comes from charging the merchants who allow Afterpay as a payment method. Afterpay charges an initial $10 fee if a user misses a payment, with more to follow if they continue not to pay. Late fees are capped to a maximum total of $68, or 25% of the purchase price â€“ whichever is lower.
A Klarna representative told the Guardian it was not currently charging late fees in Australia (though this might change in the future) and that it, too, made most of its money from merchants. Consumer groups warn that these fees may end up raising prices for all consumers, even those that donâ€™t use buy now pay later services.
Fees aside, Davis worries that young people enter into these arrangements without understanding what the negative consequences could be â€“ including that they could damage their credit rating if they fail to make repayments. Additionally, Asicâ€™s report found that only 56% of buy now pay later consumers felt they had been made fully aware of the terms and conditions when they signed up.
So have companies like Afterpay just rebranded debt to a generation averse to it?
Jackson, satisfied owner of the $600 jacket, says his parents â€œdrilled in the idea that it was bad to have credit cardsâ€ early on. Heâ€™s never had one â€“ but has no plans to get rid of his Afterpay account. â€œI never really think of it as debt,â€ he shrugs. â€œJust an easier way to spend money.â€