PayPal supports Afterpay with the option “pay in 4”

The American payments giant is moving into the territory of the Australian company AfterPay, which currently holds 73 percent of the market share.

PayPal’s new option called “Pay in 4” is exactly the same business model as Afterpay – allowing people to make four payments without interest – but it won’t charge late fees.

Afterpay generated $ 70 million in late fees in 2020, while Credit Suisse estimated the company would make around $ 107 million this year from the fees.

In FY2018-19, missed payment fee revenue for all buy-it-now, later-pay providers totaled more than $ 43 million, according to a report by the Australian Securities and Investments Commission ( ASIC) released last year.

The business regulator has criticized buy now, later pay providers like Afterpay, Zip and Humm for charging excessive late fees or other fees.

He found that one in five users buy now, pay later, payments miss, with the younger generation particularly affected as half of users aged 18 to 29 cut back on essential items to make refunds.

Its report also found that more than 1.1 million transactions in 2019 resulted in multiple missed payment fees and warned that 15% of users, half of whom were under 29, had taken an additional loan to pay off the charges. services.

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“The right thing to do,” says PayPal

A recent study commissioned by PayPal found that 96 percent of online shoppers in Australia know how to buy now, pay later, but 55 percent haven’t used it.

Late fees are one of the main reasons for avoiding it, according to the study, with 50% of Australian online shoppers saying they wouldn’t use a purchase now, but pay for a service later with ‘fees of high delay ”.

Andrew Toon, general manager of payments at PayPal Australia, said he was not throwing any late fees in Australia because “it’s the right thing to do.”

“We support the strength of our systems to determine consumer suitability with PayPal ‘Pay in 4’ and we believe we have the right measures in place to support our no late fee approach,” he said. .

“Our business model is not based on late fee income and we believe that many people who miss a payment do so by mistake, not by design.”

While some Australians may avoid the sector, it has become increasingly popular with tremendous growth recorded in recent years.

The number of buy-it-now and on-payment transactions in Australia increased from 16.8 million in fiscal year 2017-18 to 32 million in fiscal year 2018-19, an increase of 90%, according to the ASIC report.

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Late fee approaches

When it comes to late fees, every Australian business takes a different approach.

Afterpay has a tiered system based on the amount spent, customers slugging $ 10 plus $ 7 more if an account goes unpaid for seven days, with people being blocked from service until their account either paid is up to date.

Afterpay’s late fees, which it says are necessary to get customers to pay, is capped at $ 10 for purchases under $ 40, and the lesser of 25% of the order value and $ 68 for purchases over $ 40.

Another well-known provider, Zip Pay, charges $ 5 for a 21-day overdue account and an ongoing fee of $ 6 when there is an outstanding balance.

Other providers such as Humm charge a late fee of $ 6, plus $ 8 per month as an ongoing fee, while Commonwealth Bank-owned service Klarna charges between $ 3 and $ 15, depending on the amount. spent, which is capped at a maximum of $ 9 to $ 45.

Recent data released by the consumer credit market and tech company ClearScore revealed that over the past eight months, the number of consumers who now buy three or more, buy now, pay debts later has increased to 30% of users, while the number of users who missed refunds has exploded by 83 percent.

“Sooner or later a cohort of consumers will fail to keep up with snowballing repayments that incur high late fees relative to the amount borrowed,” warned Steve Smyth, Australian managing director of ClearScore.

“When these debts are sold to collection agencies, they will show up as multiple defaults, even though the dollar amount in default is relatively small. It’s a horror show about access to consumer credit in the making. “

Consumer advocacy warnings

The amount of credit available varies wildly from provider to provider, with Afterpay offering an initial credit of $ 600 to new customers, Humm has a staggering $ 30,000 available first, while PayPal’s maximum is of $ 1,500.

But consumer groups have warned that customers aren’t limited to a single purchase now, pay later, and can rack up multiple debts, when there aren’t enough checks and balances.

Suppliers are not regulated by Australia’s National Credit Code, such as credit cards and payday loans, as they do not charge interest and therefore the buy now, pay later industry is not within its purview. responsible lending and financial hardship regulations.

In Australia, 95% of the buy now, pay later market is controlled by eight companies – Afterpay, Brighte, Humm Group, Klarna, Latitude, Openpay, Payright and Zip Co. They signed a voluntary code of conduct, which came in effective in March of this year.

As part of the code they conduct, “life fit assessments” for all clients, with at least one check required for those borrowing less than $ 2,000.

The Australian Finance Industry Association told a consumer advocacy group Choice that the advantage of industry self-regulation is that it can be dynamic unlike legislation – meaning it can keep pace with innovation, technological change and changes in industry expectations. community.

He added that violations of the voluntary code had serious consequences, such as naming and shaming vendors, reporting systematic violations to ASIC or suspending their membership.

But Patrick Veyret, Senior Policy and Campaigns Advisor for Choice, said “an industry code is not a substitute for tightly enforced law.”

“While there have been minor improvements for consumers, at its core, the BNPL code is an industry diversion tactic to stave off government regulation,” he said.

“Make no mistake, buy now, pay later is a form of credit and should be regulated as such. The industry is counting on a loophole in the law. It is of particular concern to see operators selling loans to BNPL up to $ 30,000 without the protections of the current credit law, ”Veyret said.

Where to buy now, pay later might go next

When using buy now, pay later, about a quarter of Australian shoppers have used it to shop for clothing and accessories, followed by electronics and IT, according to PayPal research.

Health and beauty products, as well as home and gardening related products were also popular choices for Australians when sharing the cost of payments.

Interestingly, Australians are increasingly interested in using buy now, pay later for other goods, with 27% wanting to use it for household bills and 32% for government fees, as well as travel and event tickets.

Tommy Suffren, PayPal’s consumer insight expert, said it was encouraging to see Australians thinking about spending in sectors hardest hit by the pandemic, including travel and tourism, and paid events.

“Plus, with a lot of people watching their wallets right now, buying now, paying later could play a role in helping Australians spread those bigger but necessary expenses like household bills or even car registration. the car, ”he said.

However, PayPal Pay in 4 will not be available for certain purchases, including gambling, cryptocurrency trading, person-to-person transfers, non-profit donations, CFDs, and Forex.

The minimum spend will be $ 30 for PayPal buy now, pay later services.

For customers to be eligible, their accounts must be in good standing and use of the service is subject to adequacy checks.

To assess suitability, PayPal will primarily use its own data and analytics engines and, if necessary, perform credit checks with an external credit bureau.

ASIC has signaled upcoming regulatory changes in the buy now, pay later industry that will take effect from October of this year.

Meanwhile, Apple would be working on its own purchase now, pay a service later on any Apple Pay purchase, with the option to make four interest-free payments every two weeks or spread payments over several months and see each other. charge interest. The option would be available in retail stores and online.