COVER STORY: Buy Now Pay Later Debt Will Soon Hit $1 Billion. How Sustainable Is The Model?

As Australia’s buy now pay later (BNPL) bill races towards $1 billion, driven by the popularity of services like AfterPay and ZipPay, research commissioned by Which-50 paints a picture of growing impulsivity — especially by younger consumers — and raises some questions about the sustainability of the model.

According to ASIC, as at 30 June 2018, Australians had racked up $903m in outstanding BNPL balance
Data on consumer attitudes to BNPL collected and analysed on behalf of Which-50 by PureProfile describes how the availability of these platforms has impacted purchase behaviour. The study also reveals that a significant minority of users — almost one in three — have missed payments at some point.

Before BNPL, 29 per cent of the respondents said they would have either saved up their funds before making the payment or wouldn’t have made the purchase at all (22 per cent.)

The other half would have used a credit card. In fact, a quarter of users have set up a system of cascading debt by using their credit card to pay their outstanding BNPL balances.

According to Uwana Evers, the Pureproifle data scientist who managed the survey, “Over two-thirds of the sample (68 per cent) stated that they never miss their buy now pay later repayments, and therefore, did not incur any additional fees. Just over a quarter of the sample (28 per cent) responded that they rarely or sometimes missed their BNPL payments. Only four per cent of respondents stated that they usually or always miss their scheduled repayments.”


Consumer repayment behaviour on buy now pay later services. Source: Which-50/Pureprofile.
She said, “There was a large generational divide in missing payments: older people were much less inclined to miss payments. Higher proportions of the older generations — Baby Boomers and Gen X, over three-quarters (77 per cent) — stated that they never missed payments, compared to less than a third of the respondents from the younger generations — Millennials and Gen Z. While 18 per cent of Gen Z responded that they sometimes missed their payments, only three per cent of Baby Boomers gave the same response.”

The platforms represent a new wave of purchasing opportunity for users, by allowing consumers to buy goods — and increasingly services — without having to immediately reach for their wallet for either cash or credit. The other appeal is that consumers get their product immediately and then pay it off in installments — which is a key difference with the layby services of the past.

These new financial services are also popular amongst Millennials, giving them an alternative to credit cards.

In Australia, there are myriad platforms to choose from, with the two most popular being Afterpay and ZipPay. Others include Oxipay (now Humm), Certegy Ezi-Pay, BrightePay, and Openpay.

The Risks Of BNPL
As popular and convenient BNPL services have become, regulators have concerns.

In light of a Senate inquiry on the credit and financial sectors, ASIC released its first review of the buy now pay later sector in December last year. It found one in six users had either become overdrawn, delayed bill payments or borrowed additional money because of a buy now pay later arrangement.

From the ASIC report, 44 per cent of BNPL users had an annual income less than $40,000, with 40 per cent of those describing themselves as students or in part-time work.

Danielle Press, ASIC Commissioner, said the exponential growth in this industry and the risk this brings means the developing sector will remain an area of ongoing focus for the Commission.

This is reflected in the new product intervention powers introduced by ASIC, allowing it to intervene and take temporary action where financial and credit products have resulted in, or are likely to result in, significant consumer detriment.

Are They Creditors?
There are mixed views on the impact of BNPL services on credit ratings.

Unlike Afterpay, which taps into people’s existing credit facilities and does not do credit checks, ZipPay performs credit checks on applicants — but it does not list defaults on a customer’s credit files.

However, that could change.

A spokesperson for Zip said, “Zip is exploring Comprehensive Credit reporting. In a positive reporting environment, Zip believes that reporting repayment history would be a good thing for our customers.”

Faith Brockhoff, Risk and Operations Manager at home loan specialist Tic:Toc said BNPL doesn’t have a negative impact on home loan applications — but this does depend on the circumstances and how often they’re used.

“This generally means a lender won’t know you’ve used Afterpay unless you’ve done it recently and supplied copies of your bank statements.

“Other services that do run credit checks will show on your credit file, so the lender will know straight away.”

Brockhoff explained that most lenders add any payments someone owes to these schemes in their living expenses.

“The only issue then is that if your living expenses are too high they might determine that you’re not able to afford the loan. It’s generally about how much you owe, not who you owe it to.”

Which-50 spoke to 23-year-old Josie* who uses Afterpay and has a current balance of $674 to be paid within 60 days.

She said she got rejected from ZipPay as she said she has “too many commitments” with her car loan.

Zip told Which-50, “We perform more due diligence on new customers than any other credit provider in Australia, and have done since inception, running credit and identity checks for every single application to ensure Zip customers can comfortably afford their repayments.

“As a result of the rigour of our checks, Zip declines a large number of applicants. Our market-leading underwriting processes are further demonstrated in our results, with one in one hundred Zip customers late in any month, compared to one in six for other BNPL providers, and one in six for credit cards.”

Would Afterpay Be Profitable Without Late Payment Fees?
Each platform makes money in various ways, but usually through merchant fees, interest charges on retailers, late repayment fees for consumers and other consumer fees.

And the sector has already achieved an impressive reach, especially amongst the young. According to market leader Afterpay, one in four Millennials use it. The payment service has more than 25,300 merchant partners, many of them SMBs.

The company is building its presence in the US market, partnering with brands like Kylie Cosmetics, Urban Outfitters and Forever 21. It has recently launched in the UK under the name Clearpay after acquiring the company with the same name.

Afterpay is also making its services available in the healthcare sector, including dentistry and optometry. A spokesperson for the company said Afterpay moved into these services “as customers were asking us to enter these markets to assist them with budgeting.”

However, Afterpay’s profitability in particular seems especially reliant on late fees. While the majority of Afterpay’s revenue comes from merchant fees, a good chunk of it remains late fees from consumers — although in fairness that reliance is lessening.



Late fees as a percentage of total revenue have fallen from 22.5 per cent last year to 17.6 per cent in its most recent update, according to a company spokesperson. Yet, an analysis of 2018 results appears to indicate that the business would not have been profitable (based on EBDTA) without late payment fees since the value of those late fees appears to have exceeded the EBDTA result. Or, put another way, it only made a profit because some of its users couldn’t actually afford to use its service.

The company’s net result after tax was a loss of $9 million.

An Afterpay spokesperson declined to address the impact of late fees on the company’s profitability, despite being given opportunities to do so.

Rather than answering the question directly, Afterpay’s initial response was to say that 95 per cent of all its transactions never incur a late fee. But the flip side of that response is that it confirms the significance of those five per cent of late transactions.

So we asked a second time for clarity on the relationship between late fees and profitability, and the company again avoided specifically addressing the issue, instead writing in an email, “Afterpay actively encourages people to pay on time, encourages responsible spending and has in-built customer protections. The business model is designed to deliver a free product for customers. Fees from retailers are how revenue is generated.”

Finally, when we asked a third time, the spokesperson claimed they were inside the quiet period for financial reporting and would not be able to comment further.

Afterpay does not take into account the capacity of its customers to pay their bills. The company says it is not lending money to consumers so it does not need to run credit checks. Instead, it argues its customers use its service as a budgeting tool.

In a statement to Which-50, Afterpay said its approach is the opposite of traditional credit products. It claimed to have inbuilt customer protections, that it rewards positive repayment behaviour, and that its users cannot get trapped in debt. “We are about mutual trust, responsible spending behaviours, and flexibility in how people pay.”  It says it makes money from retailers, not consumers, and they want people to make their repayments on time.

However generous its motives, the fact remains that if its customers all paid their bills on time, it might not be profitable.

Why Choose BNPL
There are two main reasons why consumers told us they head down the BNPL route.  Either they cannot pay for something outright or they like to spread out the payments.

Our consumer survey found 43 per cent use the BNPL sites to buy something that they currently cannot pay for outright, while 66 per cent use the platform to spread out payments.


Why do consumers use BNPL services?
When it comes to making repayments, a third of respondents have either missed one or continually miss a repayment from a BNPL site.

These BNPL platforms are not restricted to digital platforms, as more retailers are letting consumers use these services in-store, growing their reach even further.

The majority of users still are solely online focused, but 48 per cent have used BNPL services in-store too — with only 18 per cent saying they only use it in a physical store.

The Millennial Factor
These digital platforms are used predominately by Millennials, who make up 60 per cent of customers according to an ASIC review into BNPL platforms.

These figures were also borne out in our study. According to Pureprofile’s Evers, “When comparing the generations, the older generations had the highest proportions of those who had never used BNPL services. Over three-quarters of Baby Boomers (76 per cent) and over half of Gen Xers (58 per cent) had never previously used these services, compared to 38 per cent of Millennials and 32 per cent of Gen Z.”

She also noted that there are big differences between the generations in the use of the lesser known BNPL services, whilst the younger generations had significantly higher proportions that utilised the bigger players in the BNPL market, Afterpay and ZipPay.

A quick peek at the Afterpay Instagram accountpresents dreamy images and airbrushed models looking more like an influencer posted them than a digital financial service, speaking to their Millennial cohort.


Afterpay Instagram page
A spokesperson for Afterpay said it is the most popular with Millennials with the average age of its consumers 33 years.

Their reason is that younger generations have an “aversion” to credit cards.

Zip told Which-50 the average customer is a 34-year-old female, in full-time employment, with a higher credit score than the average bank credit card user.

The majority of respondents from the Pureprofile survey have heard of at least one BNPL service, with Afterpay being the most widely recognised.

From the survey, 87 per cent recognised Afterpay, followed by ZipPay at 58 per cent and ZipMoney at 27 per cent.

Afterpay was the most-used service followed by ZipPay, ZipMoney, CreditLine and OpenPay.

The Upside Of BNPL
Although these platforms could increase the risk of financial hardship and put young Australians at risk, some think it’s about time layby got a digital makeover.

24-year-old Sydneysider Anna* who has used Afterpay and ZipPay in the past, said she loves to use ZipPay because you can set your schedule up to suit you and when you get paid.

Josie said she uses Afterpay as it is a convenient payment method especially since she is paid monthly.

“By breaking down the payments I am able to budget accordingly,” she explained.


Nancy Georges
Nancy Georges, a retail marketing strategist, said people respond well when there are various ways to pay at the checkout.

“It’s one of those things — somebody had to set it up, it’s great that they set it up and it’s much easier than the old school way.

“Retail is changing, and it will continue to change. Your business is changing, too. So, you know, people’s spending habits and behaviour or habits and people want things that are quick, easy.”

She said Afterpay and ZipPay are solutions that have been built by people asking “what would make the person buy an item”.

“I think that’s why it wasn’t developed by banks, or an existing retailer. Even when PayPal came, everybody was like, ‘Oh that’s not going to work, people won’t use that sort of thing’.

“But it was great because it did offer solutions around meeting the needs of what people wanted to do who are already online.”

Georges applauds those retailers who have cottoned on to implementing BNPL. “To see [BNPL] moving to bricks and mortar, I thought ‘about time’ — they’ve actually recognised that they need to put it on the windows.

“I find a lot of retailers are very savvy or quick to sort of jump on a bandwagon. When you do see them doing that you realise they’ve recognised the behaviour existing without them and now they can incorporate it.”

The only negative ramification with BNPL is that people — not the platforms — are bad at managing their finances and get themselves into a pickle, she said.

“The solution isn’t to take it away. The solution is to maybe give people skills or coping mechanisms or have some sort of alert system that flags [issues].”

There is one thing Georges can agree on with the skeptics — these BNPL platforms all need to be seen as creditors, not just a select few.

“It does need to be acknowledged for what it is. If I can take it home, and I haven’t paid for it, then I have been extended with credit,” she explained.

*Names changed to protect the identity of consumers.

Athina Mallis and Andrew Birmingham / July 15, 2019
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