The bigger question over ASIC’s focus on buy now pay later
ASIC will begin steps to monitor the buy now pay later market after a review revealed that this arrangement is influencing the spending habits of consumers especially younger consumers.
The review examined six providers of buy now pay later services, four of which are part of larger ASX-listed companies including Afterpay, zipPay, Certegy Ezi-Pay, Oxipay, BrightePay and Openpay.
ASIC’s report found that the number of consumers who have used buy now pay later services increased five-fold from 400,000 to 2 million over the financial years 2015-2016 to 2017-2018.
The number of transactions increased from 50,000 to 1.9 million between 2016 and 2018, but from 30 June 2018.
In its report, ASIC revealed that the total balance of “outstanding debt” from these arrangements grew from $476 million in April 2016 to over $903 million by June 2018.
“At the heart of the interest from the regulators is the question of what motivates consumers to use buy now pay later services like Afterpay,” RFi Group chief product officer Alan Shields said.
“According to our research, one-in-five Afterpay customers have used the service four or more times so it’s not one -off purchasers that are driving growth,” he said.
However, Shields said the bigger question is whether these services are creating a new pool of debt or are they cannibalising other mainstream debt instruments.
“After all, on face value, Afterpay and its like are not debt instruments. The vast majority (more than 80 per cent) of Afterpay customers have a transaction account or debit card funding their purchases, rather than a credit card,” Shields said.
Furthermore, these services appeal to consumers who would not normally have access to a credit card.
On ASIC’s numbers, the typical buy now pay later consumer is young with 60 per cent of buy now pay later users aged between 18 to 34 years. The data is relativity consistent with RFi Group research.
Source: RFi Group
The regulator’s next steps
The buy now pay later arrangements are not regulated under the National Credit Act and as a result, providers are not required to be licensed or to comply with the responsible lending laws that prohibit a lender from providing credit that would be 'unsuitable' for the consumer.
However, these arrangements are considered 'credit facilities' under the ASIC Act meaning that ASIC can take action where a buy now pay later provider engages in conduct that is misleading or unconscionable.
As a first step, ASIC has proposed product intervention power should be extended to all credit facilities regulated under the ASIC Act. This would allow ASIC to act quickly to address the causes if they identify a significant loss to consumers that cannot be resolved through voluntary action.
The regulation board also plans to continue to review changes made by buy now pay later providers, including to remove potentially unfair contract terms and will advise the Government to consider further law reforms if needed.
ASIC will continue to collect data to monitor the adequacy of consumer protections in this sector and review changes made by buy now pay later providers as well provide consumers information about these arraignments on ASIC’s MoneySmart website and through social media.
Although our review found many consumers enjoy using buy now pay later arrangements and plan to continue using them, there are some potential risks for consumers in using these products,” ASIC Commissioner Danielle Press said.
She added that buy now pay later arrangements can cause some consumers to become financially overcommitted and liable to paying late fees.
One in six users had either become overdrawn, delayed bill payments or borrowed additional money because of a buy now pay later arrangement.