Afterpay: BNPL is better for consumers than credit cards, and it can’t be regulated in the same way

In an uncertain macroeconomic environment and rising inflation, it’s tempting to find solace in the things that don’t change. Except perhaps for the unwritten rule that credit card interest rates go up, but they never go down. 

While many households can afford to pay off their credit card bill in full each month, not so fortunate are the millions of Australians that ‘revolve’ in credit card debt and pay interest rates of 20% or more. Despite official interest rates falling to zero in recent years, virtually nobody experienced a reduction in their credit card interest rate.

But if history is any guide, as interest rates rise, so too will costs for using credit cards. As Australia has one of the most highly concentrated retail banking sectors in the developed world, customers have often had little option but to absorb the cost.   

It is no surprise that consumers have lost trust in traditional credit products and continue to switch to safer and more transparent options, such as Afterpay. Despite the protests from some legacy providers, we continue to see more Australians using Afterpay every month, and our default rates remain close to their historic lows. The strength of our business model in an uncertain macroeconomic environment reflects the design of our product — customers repay their purchases in six weeks, which means that we are much better equipped to respond to rising interest rates. 

In the current debate about how products like Afterpay should be regulated, governments around the world have recognised that fit-for-purpose regulation is essential. Afterpay doesn’t work like a credit card and it therefore shouldn’t be regulated like a credit card. 

Unlike a credit card, Afterpay doesn’t provide customers with a high upfront spending limit. We start customers on low limits — several hundred dollars at most — and we require customers to make their first repayment upfront. Our current model exposes customers to the lowest possible risk.

Customers cannot use our product if they have missed a repayment.

We cap our late fees, and we don’t allow customers to revolve in debt. 

The cost of credit cards add up, and millions of Australians have voted with their feet for a fairer, more transparent and affordable way to manage their money. 

Research from the Australian Finance Industry Association reveals this shift. The number of active BNPL users in Australia grew to roughly 5.9 million in FY21, gaining $264 million in gross benefits driven by savings in interest, fee costs and surcharges.

But that’s just half the story. More than 135,400 Australian businesses now accept BNPL, delivering nearly $2.8 billion in gross benefits to merchants large and small, including $2.1 billion in additional revenue.

These savings and benefits are so important during times when we all face financial headwinds. 

With high inflation, it is imperative for consumers to have access to safe and affordable payment options. According to 2021 research from respected not-for-profit debt help service Way Forward, the average credit card debt of the vulnerable consumers that they assist is over $37,000. While credit cards may already be subject to responsible lending obligations, there is clearly much more work to be done to ensure that credit cards do not expose consumers to this level of harm. 

In the meantime, we look forward to working with the government on making the existing Buy Now Pay Later Code of Practice mandatory — an example of fit-for-purpose regulation that is focused on positive consumer outcomes, and has established standards that traditional credit products do not meet.

Getting this next step right is vital — for consumers, businesses, and the economy. If we get this reform process wrong it’s not consumers that will benefit, but rather the multinational credit card companies who are desperate to hook people back up to their 20% plus credit card debt cycle machine. 

Michael Saadat is the VP of global regulatory affairs at Afterpay.