Love them or hate them – and most of us love them – buy now, pay later services like Afterpay and Klarna are here to stay, used by almost all of the popular retail sites and stores.
According to the latest data, credit cards have declined seven per cent as we turn to the new payment methods. “Credit cards may become the new Seniors Card, as youth stick with debit,” Lance Blockley, managing director of The Initiatives Group told The Australian Financial Review recently.
But the late payment fees charged by the services have come under attack, especially at a time when money is scarce.
More than 250 complaints were filed about the services to the Australian Financial Complaints Authorities over 2018 and 2019. Most relate to unauthorised transactions, incorrect fees and negative impacts on credit ratings.
Consumers will now be protected by a new set of protocols which will come into effect by the beginning of next year which will include capping fees, measures to help customers manage payments and spending as well as not offering the service at all to some age groups.
The services allow a shopper to buy something immediately and pay back in instalments without interest being charged. Depending on the service, the maximum amount that can be borrowed varies between $1,000 to $30,000. And according to studies, most shoppers range between 18 to 34.
But just this week, the Australian Finance Industry Association (AIFA), which represents eight members like Afterpay, Brighte, flexigroup, Klarna, Latitude, OpenPay, Payright and Zip Co, developed a response to a Senate inquiry and Australian Securities and Investments Commission calling for stronger protections for consumers.
“Many of our BNPL (buy now, pay later) members have continued to see business growth during the COVID-19 crisis, with the vast majority of customers continuing to use BNPL products and services to manage their payments while they keep their money longer in their bank account,” said Ms Diane Tate, AFIA CEO.
The eight companies, which represent 95 per cent of the sector have agreed on some areas in the new regulation as the public consultation process ends.
“Despite the delay in launch date, our BNPL members are bringing forward best practice standards by already introducing many of the commitments in the new code, including having accessible hardship programs, membership of the Australian Financial Complaints Authority, and ensuring that customers do not spend more if they miss a payment,” she said.
Fees should be fair and capped
While the companies have agreed to only applying fair fees and even to have a cap in place, the AFIA is still in the process of identifying what a fair, reasonable, and capped fee might look like, while adhering to competition laws and considering the business models of different BNPL companies.
Afterpay which makes almost 20 per cent of its profit from late fees, currently has a cap on fees at 25 per cent of the purchase price or $68, whichever is lower.
While Openpay has different fees listed such as the fortnightly repayment fee, start up fee for spending over $1000, management fee (depending on the merchant), default fee and referral for missed payments.
Measures to help customers manage their payments and spending
These measures according to AFIA go above and beyond the law. Namely, companies will not provide additional products if a customer is in arrears and this even includes receiving promotional material if they are behind on payments or experiencing financial difficulties.
The companies are also stopping collections activity and freezing late fees when considering hardship requests. Furthermore, late fees and charges can be waived (including those already applied) while steps are taken to work out a mutually acceptable repayment arrangement.
They will also not initiate bankruptcy proceedings.
Not offering their service to people under age 18
Many companies are already implementing this. Users have to be at least 18 years of age and able to enter a legally binding contract when using these services.
Ms Tate said it is important to remember that BNPL providers are already subject to significant regulation, despite the perception otherwise.
“BNPL providers are already required to meet various legal and regulatory obligations; this is often misunderstood. BNPL providers fall under the remit of a range of laws and oversight by regulators including ASIC, ACCC, AUSTRAC, OAIC and the courts.”