There\u2019s nothing new about buying now and paying later. You can do it with lay-by or a credit card. But the version of it invented by Afterpay, and copied by so many rivals, is so different and so hugely popular it\u2019s not surprising it\u2019s raised eyebrows.<\/p>\n
The most obvious reaction is to see it as a new way of tempting young people, in particular, to overload themselves with debt and make their lives a misery. The government should be regulating its providers to limit the harm they do.<\/p>\n
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People are jack of credit cards and keen to shift to a less onerous form of BNPL.<\/span>Credit:<\/span>Matt Davidson<\/cite><\/p>\n But to see Afterpay as purely a matter of \u201cconsumer protection\u201d, as I used to, is to miss the way this prime example of \u201cfintech\u201d \u2013 the use of digital technology to find new ways of delivering financial services \u2013 is subjecting the banks and their hugely overpriced credit cards to strong competition from a product many users find more attractive.<\/p>\n And not just that. When you think it through \u2013 as I suspect the politicians and financial regulators haven\u2019t \u2013 you see that this new approach to BNPL \u2013 buy now, pay later \u2013 is also threatening the big profits Google and Facebook are making from their stranglehold on online advertising.<\/p>\n The man who has thought it through is Dr Richard Denniss, of the Australia Institute. With Matt Saunders, Denniss has written a paper, The role of Buy Now, Pay Later services in enhancing competition<\/em>, commissioned by … Afterpay.<\/p>\n Normally, I\u2019m hugely suspicious of \u201cresearch\u201d paid for by commercial interests, but Denniss is one of the most original thinkers among the nation\u2019s boring economists.<\/p>\n Buying something via Afterpay allows you to receive it immediately, while paying for it in four equal, fortnightly instalments over six weeks. Provided you make the payments on time, you pay no interest or further charge. The fortnightly payments fit with most people\u2019s fortnightly pay.<\/p>\n If you\u2019re late with a payment, you\u2019re charged a late fee that varies from a minimum of $10 to a maximum of $68, depending on how much you\u2019ve borrowed. If you don\u2019t pay the late fee and get your payments up to date, Afterpay won\u2019t finance any more BNPL deals until you have.<\/p>\n If you never get up to date, you\u2019re not charged interest or any further late fees. Eventually, Afterpay ends its relationship with you and writes off the debt.<\/p>\n The individual amounts people borrow are usually for just a few hundred dollars. You can have more than one loan running at a time, but only within the credit limit Afterpay has set, and only if your existing payments are up to date.<\/p>\n The phenomenon of buy now, pay later was supercharged by the e-commerce boom during the pandemic.<\/span>Credit:<\/span>Louie Douvis<\/cite><\/p>\n Afterpay sets a fairly low limit initially, but increases it as you demonstrate your payment reliability.<\/p>\n So, what\u2019s in it for Afterpay? It charges the shop that sold you the stuff a merchant fee of about 4 per cent of the sale price. I used to suspect they made a lot from their late fees, but these remain a small part of their total revenue, almost all of which comes from merchant fees.<\/p>\n Despite its huge expansion, Afterpay has yet to turn a profit, putting it in the same boat as Uber, Twitter and other digital platforms. Of late, the BNPLs have had greatly increased bad debts and the sharemarket has fallen out of love with them. This doesn\u2019t affect Afterpay, which has been taken over by a big American fintech, Square, which has many other irons in the fire.<\/p>\n Obviously, Afterpay and its imitators are offering a way to BNPL that\u2019s an alternative to a conventional credit card, which involves charging merchants a fee of a couple of per cent, and offering interest-free credit provided<\/em> you pay your balance on time and in full each month.<\/p>\n Afterpay is genuinely disruptive, offering users what they may justifiably regard as a better product.<\/p>\n If you can\u2019t keep that up \u2013 as the great majority of credit-card holders can\u2019t \u2013 you get hit with interest on your purchases of an extortionate 20 per cent-plus. These rates haven\u2019t changed in decades while other interest rates have fallen. That\u2019s a sign the banking oligopoly has huge pricing power in the provision of consumer credit.<\/p>\n It seems clear from the declining growth in credit-card debt and the amazing popularity of Afterpay and its imitators that people are jack of credit cards and keen to shift to a less onerous form of BNPL.<\/p>\n Many young adults, in particular, seem to have sworn off credit cards because they\u2019re just too tempting. Behavioural economists call this a \u201cpre-commitment device\u201d. The best way to ensure you don\u2019t end up deep in ever-growing debt is not to have a credit card in the first place.<\/p>\n These people regard Afterpay & Co as a much less risky way to BNPL, a ubiquitous practice economists sanctify as \u201cconsumption smoothing\u201d.<\/p>\n Those who want to regulate the new BNPL by stopping providers from prohibiting merchants from charging users a surcharge \u2013 the way they stopped Visa and Mastercard from banning surcharging \u2013 see this as levelling the competitive playing field between the two different forms of BNPL.<\/p>\n But Denniss\u2019 insight is to point out that the two merchant fees are quite different. The credit-card merchant fee can be regarded as a transaction fee \u2013 that is, merely covering administrative costs \u2013 but in Afterpay\u2019s case it covers much more than that, to justify its much higher cost.<\/p>\n What Afterpay offers is something marketers understand, but economists have yet to: better \u201ccustomer acquisition\u201d. Being able to offer free credit is one aid to acquiring customers, but Afterpay does much more to attract customers to those merchants who offer its BNPL service.<\/p>\n Younger consumers like the new BNPL so much they search the internet for sellers of the item they want to buy that also offer Afterpay. Afterpay uses a directory of stores on its website \u2013 and also its mobile app \u2013 to direct potential customers to participating merchants.<\/p>\n Afterpay also sends messages to its users advertising its merchants\u2019 special offers and the like.<\/p>\n So Afterpay\u2019s merchant fee also provides its merchants with a new form advertising, thus reducing their need for online advertising through Google or Facebook.<\/p>\n Afterpay is genuinely disruptive, offering users what they may justifiably regard as a better product. Regulators should think twice before they seek to discourage it by presenting customers with a misleading comparison: a merchant fee of 4 per cent versus 2 per cent.<\/p>\n<\/p>\n