Afterpay must be regulated, consumer groups warn
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Afterpay must be regulated, consumer groups warn

A coalition of consumer groups has called on the federal government to regulate Afterpay and other 'buy now, pay later' services as small credit companies flood into the market, offering lay-by schemes on everything from flights to equestrian gear.

Afterpay, which has seen its share price surge by 14 per cent since New Year's Day alone, is one of a dozen operators preparing to face a Senate inquiry into the sector.

The Australian Banking Association, whose members missed out on market share to the start-up competitors as they battled allegations of systemic misconduct at the banking royal commission, have been lobbying to have them reined in under the umbrella of the banking sector, warning younger at-risk consumers risked being trapped in a cycle of debt.

Afterpay's economic adviser Craig Emerson says there are strict limits on how much money can be used with the service.

Afterpay's economic adviser Craig Emerson says there are strict limits on how much money can be used with the service.Credit:Vince Caligiuri

Choice, the Financial Services Union, the Consumer Action Law Centre, the Customer Owned Banking Association and the Financial Rights Legal Centre have echoed the banks concerns, urging policymakers to bring 'buy now, pay later' providers under the National Credit Protection Act.

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Such a move would force the companies to conduct credit and affordability checks at the counters of retail chains including Bing Lee, David Jones and Sephora. They would also be compelled to provide hardship assistance and pay to be a member of an external dispute resolution scheme.

Former NSW premier Nathan Rees, now the deputy leader of the Financial Services Union, said if poor behaviour existed in the highly regulated banking environment then the capacity for poor consumer outcomes in less regulated environments was even greater.

Consumer advocacy group Choice said the companies profited through late fees, potentially putting vulnerable young customers at risk. Afterpay maintains it makes most of its revenue by charging shops to use the service and does not charge interest, making it distinct from other financial services firms.

"It is imperative to have legal safeguards in place to prevent these schemes from preying on those who can’t repay on time and unfairly profiting from this perverse incentive," Choice said in its submission to the inquiry.

Former Australian trade minister Craig Emerson, now Afterpay's economic adviser, said the banks were running a scare campaign while watching their credit card use fall.

"Millennials in particular like Afterpay so much they have coined the phrase 'I’ll Afterpay it'," he said.

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"There are strict limits on the amount that be involved. You can't get into a debt trap if the maximum amount that can be loaned to you is $2000."

But Financial Rights Legal Centre co-ordinator Karen Cox warned at-risk consumers often take out multiple loans.

"Customers regularly go without essentials, pay consumer leases and pay day loans over other debts, and turn to repeat and multiple concurrent borrowing to feed a cycle of unsustainable debt," she said.

In the lead-up to this month's Senate inquiry, the sectors biggest players are preparing for change.

Afterpay has backed a call to give the Australian Securities and Investment Commission greater powers to intervene in the sector. Rival Zip pay endorsed a push for greater regulation, arguing specialists should be compelled to verify customers identities, income and credit history.

Mr Emerson said Afterpay did not want a situation of zero regulation.

"They are happy to work with regulators on a situation that still allows for innovation," he told 2GB radio.

What's at stake? 

Regulated credit providers (Commonwealth Bank, NAB, ANZ etc) 

Have a legal requirement to:

  • Conduct responsible lending checks, assess affordability of repayments before provision of credit. This includes assessing income/expenses, where customers live, employment, assets and liabilities.
  • Assess a customer’s ability to repay a credit card limit within three years when making the affordability assessment.
  • Provide hardship assistance such as deffered or alternative payment plans to customers experiencing financial difficulty.
  • Maintain an internal dispute resolution process to deal with disputes under a credit contract.
  • Pay to be a member of the Australian Financial Complaints Authority so that customers have access to the dispute resolution scheme.

‘Buy now, pay later’ providers (Afterpay, Zip pay etc) 

Have no legal requirement to:

  • Conduct affordability checks.
  • Consider a customer’s ability to repay within a specified period even if some form of credit assessment is conducted.
  • Provide hardship assistance.
  • Have an internal dispute resolution process or be a member of an external dispute resolution scheme.

National Debt Helpline: 1800 007 007

Eryk Bagshaw is an economics correspondent for The Sydney Morning Herald and The Age.

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