Afterpay, Zip under microscope: ASIC supports further buy-now-pay-later regulation

Corporate regulator ASIC wants the power to more closely regulate the fast-growing buy-now-pay-later market, identifying a series of lending risks that services such as Afterpay pose to consumers.

Releasing the findings of a review into buy-now-pay-later services today, ASIC found consumers owed $903 million to services such as Afterpay, Zip Pay and others as of June 30, 2018.

One in six buy-now-pay-later users had either become overdrawn, delayed bill payments or borrowed additional money to meet their payments, ASIC found.

The findings come amid heightened scrutiny on companies such as Afterpay in the lead up to a Senate inquiry which will examine whether buy-now-pay-later should be regulated under national consumer credit protections.

ASIC signals regulatory scrutiny

At the moment, ASIC has limited ability to regulate conduct in the industry and address lending risks, raising concern there’s not enough preventing providers from skipping out on due diligence.

The corporate regulator said it supports extending proposed product intervention powers to all types of credit facilities, including buy-now-pay-later, arguing it would provide a “flexible toolkit” to take appropriate action to protect consumers.

The powers are currently being considered by parliament and would enable ASIC to intervene in the market to ensure consumer protection.

“The exponential growth in this industry, along with the risks we have identified, means this will remain an area of ongoing focus for ASIC,” commissioner Danielle Press said in a statement.

However, ASIC said it has “not yet formed a view” on whether buy-now-pay-later should be regulated under consumer credit protections.

The regulator found only one of the six reviewed providers (including Afterpay, Zip Pay, Certegy Ezipay, Oxipay, BrightePay and Openpay) were examining the income and existing debts held by customers before providing their service.

Loan amounts offered by each business vary from $1,000 to $2,000 in the case of Afterpay, Zip Pay and Oxipay, to as much as $30,000 in the case of Brighte and Certegy.

Responding to the review in a statement posted to the ASX on Wednesday, Afterpay said it looked forward to working with ASIC on its monitoring of the industry.

“Afterpay appreciates that having clear oversight from ASIC will further increase public confidence in our product and ensure additional consumer protection is provided,” Afterpay said.

Afterpay has previously outlined its support for an expansion of product intervention powers.

In a statement posted to the ASX on Wednesday, Zip Pay also outlined its support for product intervention powers.

“[Zip Pay] supports efforts from the regulator to increase standards across the sector,” the company said.

Gravy train to slow down?

Buy-now-pay-later has exploded in popularity in recent years, delivering retail businesses with a new growth vertical, particularly with younger shoppers.

It has extended the purchasing power of a demographic of shoppers disposed to shopping online, helping to fuel the growth of e-commerce in Australia.

The regulator found the use of buy-now-pay-later has increased from 400,000 users to two million between 2015-16 and 2017-18, 60% of which are aged between 18 and 34.

Transaction numbers have increased from about 50,000 in 2016 to 1.9 million as of June 2018.

But the prospect of stricter regulation could put a damper on growth, particularly if a crackdown results in stricter control over which customers can access buy-now-pay-later facilities.

Commercial lawyer Richard Pragnell of Viridian Lawyers says he’s not surprised ASIC want to regulate the space more closely, warning businesses not to rely too heavily on buy-now-pay-later platforms.

“ASIC is pretty concerned, the whole pay-later industry is effectively built on an exception that gets providers around regulation,” he tells SmartCompany.

“It may be the case that further scrutiny by ASIC, particularly with regulation, reduces the number of participants in the market.”

“The gravy train will start slowing,” Pragnell explains.

Crackdown concerns

Businesses SmartCompany spoke to about the possibility of a crackdown say it’s probably good for the long-term health of the industry for regulators to play a bigger role, but short-term revenue could suffer.

Mitch Wood, owner of Lux BMX, uses both Afterpay and Zip Pay to help customers with purchases of custom bikes often worth over $1000.

He says the platforms have been great for consumers and businesses, but a crackdown would affect sales.

“It would definitely have an impact on us,” he tells SmartCompany.

Wood believes there’s a consumer responsibility aspect to buy-now-pay-later though, which has disrupted the way consumers access credit for retail purchases.

“I can’t see how it’s different to Commonwealth Bank trying to give you a credit card when you’re 18,” he says.

Previously, costumes.com.au founder Nathan Huppatz told SmartCompany he didn’t expect much to come from a Senate inquiry into the industry, but that regulatory scrutiny could slow growth.

“If someone like Afterpay has to tighten up their checks, then yes, that could have an impact,” he said.

No “adverse effect”

Hunting for George sales manager Jonno Rodd says the review confirms the interest in buy-now-pay-later among younger consumers.

“The customer base and audience these services speak to is big and growing. They are being innovative in their marketing and driving awareness to retailers in a way no other payment method has done in the past,” Rodd tells SmartCompany.

Rodd says he doesn’t think increased regulation will have any “adverse effects” to the industry.

Merchants charging higher prices?

ASIC is also looking at what consumers are paying for participating in the industry, specifically whether associated fees are fair.

“One area we will be targeting is where consumers are paying more than they need to for using a buy-now-pay-later arrangement,” Press said.

This relates to “anecdotal evidence” ASIC said it received about merchants charging consumers “significantly higher prices” for using buy-now-pay-later in cases where products were high-value purchases and prices were negotiable.

“ASIC is considering the legal position of scenarios where a merchant inflates the cost of the underlying goods if a consumer uses a buy-now-pay-later arrangement,” the regulator said in its report.

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