A digital payment app called Afterpay has been growing increasingly popular amongst millennial shoppers and big-name retailers.
Its offering has been described as "modern day lay-by" — except customers can take home their goods immediately, instead of having to wait until all their instalments have been repaid.
But consumer advocates have warned that Afterpay promotes irresponsible spending with its "Shop now, take now, [re]pay it in four [instalments]" proposition.
All of this is happening in an environment where the retail industry is struggling to boost sales, and Australian consumers are trying to pay off record levels of household debt.
What is Afterpay?
Afterpay is an ASX-listed company formed in 2014 by Nick Molnar and Anthony Eisen, its managing director and executive chairman respectively.
73 per cent of its customer base is millennials, people aged between 17 and 37 (those born between 1980 and 2000).
It claims to have more than 1 million users, and 7,500 retailers which offer its payment platform online or in-store — including Myer, Country Road, Kathmandu, Toys 'R' Us and many female fashion brands.
The company's biggest endorsement to date comes from Jetstar. The low-cost airline began allowing customers to book flights using the new digital payment system last week.
Retailers pay Afterpay, on average, a 4 per cent commission (plus 30 cents) for each transaction processed through the payment platform. This could be a small price to pay if it lifts sales.
Mr Eisen said, "Afterpay is a service for customers to allow them to buy life's little luxuries and necessities, and spread their payments over time in four payments."
For example, like a credit card, the customer can purchase a $100 jacket and take it home without needing to pay anything on the day.
But similar to lay-by, the customer would need to repay Afterpay in four instalments of $25 every fortnight over eight weeks.
The company does not charge fees as long as the customer makes all four repayments on-time.
Mr Eisen also promotes his company's proposition as a win-win for both retailers and consumers.
"Afterpay takes on all of the risk that the customer may not pay us back in the future. So from a retailer's perspective, it's risk-free."
However, it is not as "risk-free" for consumers who default on their payments.
Earning money from late payments
Afterpay's revenue from late fees has risen by 4 per cent since last year.
"Eighty per cent of their $22.9 million revenue we saw in the last financial report comes from retailers," said the Retail Doctor Group's chief executive Brian Walker.
"And 20 per cent comes from customers that are unable to meet the payment in that four-stage cycle."
Missing a repayment instalment attracts an initial $10 penalty.
Furthermore, Afterpay charges customers a further $7 late fee if that instalment remains outstanding after one week.
So a customer who misses all four instalments is subject to a total late fee of $68 for each transaction.
In practical terms, a customer who misses all payments on a $400 jacket would need to pay a maximum late fee of $68 — which works out to be 17 per cent of the purchase price.
But if a customer were to buy four shirts — in four separate transactions — at $100 each, the maximum late fee would be $272, which is 68 per cent of the purchase price.
On average, credit cards charge a 20 per cent interest rate for outstanding balances.
Mr Eisen, however, said his company makes every effort to prevent customers from having to make hefty repayments.
He stressed that most of Afterpay's income is made from the fees it charges retailers for using the payment systems.
Also, if customers are late with payments, the Afterpay app prevents customers from making any further purchases, he explained.
"Before a payment is due, we communicate very strongly with the customer with SMS to remind them to have sufficient money in their account.
"To the extent the customer doesn't have the funds in their account, we'll notify them straight away.
"And in every situation, we'll waive the late fee at that point — if they're able to remediate that position in a short amount of time."
No credit checks, instant approval
Consumer advocates are expecting to see more people come to them with debt issues related to Afterpay.
"There is a risk of services like Afterpay leading people to having more debt than they can handle," said the Consumer Action Law Centre's senior policy officer Katherine Temple.
"These businesses aren't required to do any form of responsible lending checks."
Afterpay approves customers' purchases "instantly", a promise which features prominently on its promotional materials.
"Considering the approval process is pretty much instant, there doesn't seem like there's any in-depth assessment of whether someone can make repayments without having serious financial hardship," Ms Temple said.
Afterpay claims it is not a credit product, as it does not charge customers an interest rate for late payments.
As a consequence, Ms Temple said it appears the company is not covered by provisions of the National Credit Code which require credit card providers and other lenders to discharge "responsible lending obligations" — which require credit and affordability checks to be conducted on borrowers.
"Another potential loophole they're taking advantage of is exemptions around short-term credit [of] less than 62 days," she said.
Afterpay's schedule of repayments across four fortnights equates to 58 days — which is four days short of that 62-day period.
So far, retailers are have been enthusiastic about Afterpay's product, which is also useful for customers who understand the risks and are good at budgeting.
"It's all about buyer beware," Mr Walker warned.
"We would always counsel any consumer to have the wherewithal to meet the obligations of their purchase."
Otherwise, they may get more than they bargained for.