Afterpay Late Fees – Gouging Consumers?

A very interesting read from Financial Review’s Chanticleer opinion column. 

Afterpay’s late fees anomaly

As Afterpay has taken the buy now, pay later business model to the world, its flexible bad debt strategy has put the spotlight on glaring regulatory anomalies.

AFR Chanticleer June 11, 2021 

When Morgan Stanley published a major report this week on the buy now, pay later market darling Afterpay, it whacked a $145 price target on the stock.

The broker said the stock justified this price target, which is 45 per cent higher than Afterpay’s closing price on Thursday of $99.85, because of its likely 70 per cent compound annual growth in revenue out to 2023.

The report, by five Morgan Stanley analysts led by Andrei Stadnik, contained many powerful insights, but the line item that caught Chanticleer’s eye was “late fees”.

 Stadnik’s model assumes Afterpay’s late fees will rise to $340 million by June 2023, from $99 million this financial year. That suggests late fees will rise from about 10 per cent of total revenue to 13.6 per cent by 2023, according to the broker’s forecasts.

Consumer groups have drawn attention to Afterpay’s late fees because, in a worst case scenario, a consumer in Australia who misses four successive payments on a $272 purchase would owe Afterpay a “capped” late fee of $68, the equivalent of 25 per cent interest in one month.

 An item costing less than $40 would incur a maximum late fee of $10 and for each order of $40 or above, the total of the late fees that may be applied are capped at 25 per cent of the original order value, or $68, whichever is less.

If you apply the periodic payment calculations used for credit cards to Afterpay’s late fees, the equivalent interest rates would be between 55 per cent and 68 per cent per annum in some cases.

There is clearly a regulatory anomaly around late fees given that Afterpay has been forced to adopt much tougher and more consumer-friendly rules on late fees in the United States and Britain.

For example, in the US there are three small states which prohibit late fees. More than half of the US states allow late fees but these are capped at $US8 ($10.30).

In New York State, the late fee for the first missed payment is a single-digit percentage of the value of the purchase, and the maximum late fee is four times that.

It would be wrong to accuse Afterpay of deliberate regulatory arbitrage in relation to late fees. It has simply adapted its business model to different jurisdictions.

But it would be naive to think the global regulation of buy now, pay later will not converge towards a common approach to late fees. This could threaten a big chunk of Afterpay’s revenue based on Stadnik’s forecasts.

Politicians have played the innovation card in successfully defending the light regulatory touch applied to buy now, pay later.

But it will be harder to sustain that argument when consumer groups highlight the fact that innovation has opened the way for Afterpay to slug Australian consumers much more heavily than their counterparts overseas.

SUMMARY OF MARKET RESEARCH AUSTRALIA & USA

BNPL can lead to money troubles:

Almost a third of people (28%) who have used BNPL found themselves in money troubles as a result. This includes:

• 16% of people overstretched the budget leaving them struggling to pay for other expenses.
• 14% have paid a late fee.
• 9% (almost 1 in 10) went into overdraft on their bank account because of BNPL payments.

BNPL causing people to impulse buy:

More than half of those surveyed (53%) said they are more likely to impulse buy using BNPL.

Almost 7 out of 10 young Australians said it makes them more likely to impulse buy (68% of 18 to 34-year-olds).

Women are more likely to impulse buy using BNPL than men (women 57%, men 47%).

ASIC Research ( Regulators own research show the issues - why no action?)

 21% of buy now pay later users missed a payment in the last 12 months.

 Among these consumers:

 ? 47% were aged between 18 to 29;

 ? 39% also held a small and/or medium amount credit contract;

 ? 34% made at least six buy now pay later purchases in the last six months; and

 ? 55% had used at least two different buy now pay later arrangements in the last six months.

ASIC Report - Percentage of active users who were charged a missed payment fee (April 2016–June 2018)

 AUSTRALIAN PAYMENTS MARKET

BNPL is tiny within the $1.34 Trillion retail payments market

Australian’s use 70 million cards with $712 billion annual spend.

The ‘digital’ National Payment Platform (NPP) $585 billion.

Cash including ATMs $112 billion.

BNPL $11 billion

Cheques $6 billion

After 7 years twenty-four BNPL apps have sales of $11 billion – or 74 basis points down 10 points on January 2021.

It’s also clear BNPL has peaked in Australia – Afterpay customer growth in ANZ for the last 3 months was zilch and sales increased by only 18% its lowest performance ever.

BNPL SPEND PER CUSTOMER IS VERY LOW

Credit cards - $1230

Debit cards - $806

BNPL apps - $48 to 58

(March 2021 RBA figures)

Credit and debit are monthly spend, BNPL ‘bills’ consumers every 12-14 days, it’s still a paltry amount per bill, yet this is the great new thing in payments and you can only get $50 sale per bill?

 BNPL HAS NO LOYALTY

MacQuarie commissioned consumer research in USA, the results are devastating for BNPL’s claims.

 1.6% of consumers say BNPL is their primary method of instore payment.

 3.1% as the primary payment method of online shopping.

Only 5% of active users see BNPL as primary instore payment, while 9% as their primary online payment method.

Loyalty the key driver of consumer payment behaviour is highly questionable according to MacQuarie. US consumers say they will change payment types rather than change stores and will swap BNPL provides even quicker, this equals a total lack of loyalty.

63% of consumers will use a different payment type e.g. debit card

A whopping 70% say they switch BNPL providers.

MacQuarie’s verdict is brutal the “merchant owns the customer, not the BNPL”. This applies consistently to all BNPL brands and is not good news!