How are businesses and consumers being influenced and affected?
While many people are still unaware of the buy-now-pay-later industry or how it works, the prevalence in the economy is going from strength to strength.
The premise of these buy-now-pay-later arrangements allows consumers to obtain goods/services immediately and pay for them over time. Predominantly the industry makes its money from two sources: merchant fees, and late fees.
It could be described as a modern-day layby service; however, unlike that nostalgic time spent as a teenager waiting for paydays to roll around before rolling up to the layby counter cash in hand, the buy-now-pay-later options are automated, linked to debit/credit cards, structured as short term contracts or as a line of credit.
As insolvency practitioners we're interested in the effect on personal insolvency matters. It's long held that credit card debt is a large component of being "unable to pay debts as and whey they fall due" (the insolvency definition). Since the Senate Inquiry into the buy-now-pay-later industry in January 2019 (read our article here), the media has frequently cited a shift from credit card debt to a buy-now type debt.
In reviewing our bankruptcy files across our 28 offices, we're yet to see these buy-now-pay-later providers as creditors. But we believe that it's inevitable—especially with the shift into purchasing high-value items with longer repayment terms with these providers.
The marketplace has certainly adapted, with:
- Visa announcing in July it was entering into the 'instalment payment capabilities' market.
- Flexi Group diversifying into homeowner demographic with agreements with Temple & Webster, Bing Lee, Betta Electrical, Williams Sonoma and Pottery Barn.
- Payright raising $27 million after seeing 650% revenue growth (Payright offers a buy-now-pay-later solution for big-ticket items between $1,000 to $20,000).
Putting aside the industry enjoying a new consumer paradigm and the possible influence on people's financial stability (and overall consumer protection), we wonder what the effect is on businesses providing buy-now-pay-later as a mode of payment, namely:
- Has revenue increased?
- Have profit margins reduced due to related merchant fees/other overheads. And if so, how do these fees compare to the traditional merchant fees (Visa, Mastercard etc.)?
- How much pressure is on businesses to enter into these arrangements—and, if they don't, will or have they lost customers?
We understand that Afterpay does not permit retailers to pass on the merchant fee and that businesses should view this as being the cost of having access to the buy-now-pay-later consumer base. And as another offset, an Afterpay spokesperson said:
"Afterpay settles with retailers quickly and automatically, there are no complicated processes or lengthy wait times, and Afterpay assumes all end-customer non-payment risk for every single transaction." 1
Some conclusions we've made from following media and industry reports are:
- As of July 2018, 2.2 million people used Afterpay. Continued growth will substantially influence an increase in new and continued merchant agreements.
- Recent liquidations of retail businesses indicate e-commerce has more of a positive effect on sales and margins. Given Afterpay is reportedly assisting in propping up retail sales—especially e-commence sales—this sale's pool might be worth the merchant costs (currently 4% to the retailer).
- Sixty-three percent of the millennial generation (those aged 18 to 29) currently do not have a credit card. Undoubtedly, buy-now-pay-later will appeal to this group—especially as their income and buying power increases.
- Obviously, business owners must crunch the numbers and consider their markets, especially if behaviour shifts back to more traditional credit card usage, to determine whether this is the option for them before jumping in headfirst.
Regardless of how the wheels of commerce turn in this industry, consumers should be aware of some possible credit issues with certain providers (varying structures and laws apply to different products) in terms of:
- Any defaults appearing on credit ratings.
- Home loan applications/refinancing might determine multiple bank account deductions as ongoing monthly living expenses that get factored into loan servicing purposes.
What is clear is that the industry will continue to evolve along with the requisite regulation—so watch this space.
ASIC's Smart Money website gives some useful information and case studies for consumers to understand buy-now-pay-later services. As always, your local Worrells Partner is available to talk through any insolvency concerns your client might have.
Related article: Buy-now-pay-later operators probed by Senate inquiry
1Sydney Morning Herald. Buy-now-pay-later surcharges small businesses feeling fee pinch. 11 July 2019.
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