Buy-now-pay-later services like Zip and Afterpay have grown rapidly. (ABC News: Chris Gillette)
Popular “buy now, pay later” services like Afterpay and Zip Pay have been the subject of more than 250 complaints to the Australian Financial Complaints Authority in the eight months to the end of June.
- Calls for the federal government to increase regulation of buy-now-pay-later services
- Companies like Afterpay and Zip Co are resisting increased regulation
- More than a million transactions are now made a month using the service
The complaints relate to unauthorised transactions, incorrect fees and negative impacts on credit ratings.
“I really think that complaint levels are the tip of the iceberg,” Gerard Brody from the Consumer Action Law Centre told 7.30.
“Many people won’t even know where to go when they’ve got a complaint with a buy now, pay later provider.
“Even if people do go to the Australian Financial Complaints Authority because, for example, they’ve been over extended, there may be not much that the complaints body can do, because the laws don’t apply to buy now, pay later providers.”
The buy-now-pay-later fast credit revolution has rapidly changed how we shop.
The services are being used in millions of transactions each month and allow a shopper to buy something immediately and pay the amount back in instalments without interest being charged.
Depending on the service, the maximum amount that can be borrowed varies between $1,000 and $30,000.
It is particularly popular with shoppers aged between 18 and 34 and is widely available in major retail outlets, from department stores to fashion brands.
And now the Morrison government is grappling with whether more protection is needed for the millions of shoppers who are already using the popular services.
‘Not always sustainable’
Lucy Kalwila is a regular user of Zip Pay but thinks it should be better regulated. (ABC News: Chris Gillette)
Single mother of three Lucy Kalwila lives north of Brisbane and is a regular user of Zip Pay.
She believes there should be increased regulation.
“It should change, because sometimes when you get a Zip Pay it’s too rich a loan to be given and it’s something that’s not always sustainable,” she told 7.30.
Ms Kalwila has been a Zip Pay customer for about four years.
She has suddenly found herself in financial hardship due to several large debts, including for a car loan, and her vehicle is at risk of being repossessed.
She was also forced to move several times after leaving a relationship where there was domestic violence.
This year she has used Zip Pay to spend about $1,200, mainly for a new couch.
She isn’t aware of Zip Co doing any checks to verify whether she could still afford to buy it after her financial situation changed.
Lucy hasn’t missed a minimum repayment of $40, which includes a $6 account fee each month, but she still owes $965.
But she says it is an added strain while she works with a budgeting service to address her other debts.
“I’m a good customer, I make all my payments,” she said.
“I think it doesn’t really bother them as long as I’m making those payments.”
7.30 provided Zip Co with specific details about Lucy Kalwila’s case, including her written consent to discuss it.
But Zip Co’s chief operating officer, Peter Gray, refused to answer detailed questions, including about whether the company had performed a credit check this year before approving her recent purchases.
“For privacy reasons, it’s difficult to sort of comment on specifics of any individual customer,” he told 7.30.
“But what I can say is that we are conducting the relevant checks up front prior to extending credit to a customer.
“We would encourage any customer who is experiencing financial hardship to identify themselves to Zip and allow us the opportunity to work with them to find a solution.”
Industry divided on regulation
Zip Pay’s Peter Gray thinks the national credit code should only apply to services catering for larger transactions. (ABC News: Nadia Daly)
The industry is divided on what further regulation is needed, with some key players arguing that applying the national credit code would stifle growth and unfairly affect customers and merchants by slowing down the approvals process.
The industry is working on a code of practice that could result in a set of minimum standards in contentious areas, such as assessing a customer’s capacity to pay and limiting revenue from late fees.
Zip Co is experiencing rapid growth, with more than 1.3 million active customers, and estimates its revenue will reach $141 million by 2020.
It already carries out identity and credit checks on customers of its Zip Pay and Zip Money brands.
Mr Gray says his company only wants the national credit code to apply to services providing more than $2,000 to the customer, which would mean its Zip Pay brand is exempt.
“Zip supports further regulation for the sector on the basis that it was industry specific (and) dealt with the massive uptake in services,” he told 7.30.
“Zip put forward a policy recommendation as part of the Senate inquiry, and some of those recommendations were for further regulation, including income verification on applicants.
“We are (already) pulling banking transaction information on our customers prior to them signing up.”
Its key competitor, Afterpay, is also against having responsible lending laws applied.
Afterpay is currently being audited by Australia’s financial intelligence watchdog, AUSTRAC, over concerns about how it identifies and verifies customers, and its compliance with legal obligations under anti-money laundering and counter-terrorism financing laws.
But Flexigroup, which operates the service Humm and has 1.4 million customers, says it is open to considering the national credit code.
Corporate regulator, the Australian Securities and Investments Commission (ASIC), is also keeping a close eye on the sector and now has the ability to use its product intervention power if it sees consumers are losing out.
It found that more than 40 per cent of users had incomes of less than $40,000 and many were students or working part time.
ASIC hasn’t decided if the sector should be subject to responsible lending laws like other credit providers.
A senate inquiry recommended the Federal Government consider further regulation, in particular around ensuring that services assess the financial situation of consumers before extending them credit.
Currently buy now, pay later is not subject to the National Credit Act and its code, meaning the providers are not required to meet responsible lending obligations, such as assessing someone’s suitability for a loan or having hardship arrangements, something consumer groups want to change.
Credit for people who can’t get a credit card
Scott Phillips is concerned that unregulated buy-now-pay-later services will add to economic stress in the event of a downturn. (ABC News: Justin Huntsdale)
Scott Phillips watches the buy now, pay later sector closely and believes that in an economic downturn outstanding debt could pose a risk.
He is the chief investment officer at Motley Fool, which provides advice to share market investors.
“If we end up with some sort of economic shock, the individual consumer cost and, frankly, the economic impact is something we’re just not prepared for,” Mr Phillips told 7.30.
“The very attraction, very reality of Afterpay and Zip Pay, is that people who haven’t got a credit card or weren’t eligible for a credit card, are now using this form of consumer debt.
“We simply don’t know how likely they are to pay back — or not pay back — the debts if, or when, things get tight.
“If unemployment spikes, if they lose their job, are they more likely or less likely to pay back those debts or to cause financial stress on the company or the economy as a whole?”
Financial counselling services are experiencing increasing numbers of people coming forward who are in significant debt for other reasons but are also struggling to repay buy now, pay later amounts.
“At the national debt helpline we are receiving more and more calls from people who have debts to a buy now, pay later provider,” Mr Brody said.
“It’s often one of many debts that people have, like credit cards, utility debts and others, and it’s adding to people’s debt stress.
“As it grows more and more throughout the economy, we can only expect that there’ll be more people who have got debts to buy now, pay later providers.”
But Zip Co’s Mr Gray doesn’t see the $700 million worth of outstanding debt held by his company as a problem.
“No, (it’s not unsustainable), this is demonstrated in the results of our underwriting models and our focus on responsibility,” he said.
He defended his company’s record on responsible lending, saying it rejected more than 35 per cent of applicants, which resulted in fewer customers charging late fees.
“With Zip, one in 100 customers is late in any given month, and this is in comparison to credit card, (which) has one in six, or other buy now, pay later products that are also about that one in six,” he said.
“Of that, one in 100 who is late … identify themselves as having a financial hardship or having experienced a change their financial circumstances.”
Consumers ‘being left high and dry’
Gerard Brody says buy-now-pay-later services could leave people more indebted. (Supplied: Consumer Action Law Centre)
Gerard Brody wants the Federal Government to act quickly.
He is calling for responsible lending obligations to be applied to the buy now, pay later sector.
“If the Morrison government doesn’t act, consumers are being left high and dry, they’re being left at the whim of these providers, and the risk is that they will become more and more over indebted,” he said.
In a statement, a Government spokesperson said it was still considering its response to the Senate inquiry’s final report.
It also said it had passed legislation earlier this year giving ASIC the power to intervene in the buy now, pay later sector.
“The reforms will reduce the risk of consumers, including consumers of buy now, pay later products, acquiring or being mis-sold products that do not meet their needs and are not suitable for them,” the statement said.