An in-depth investigation into the often controversial buy now pay later industry by the corporate regulator that will assess whether new laws are needed to protect consumers will be made public in December, as new criticism is levelled at the model of local giant Afterpay Touch Group.
Sources told AFR Weekend the Australian Securities and investments Commission was putting the finishing touches on its deep dive into the sector in readiness for a late-2018 release, after it came up against some delays.
The regulatory review kicked off earlier this year, with the aim of determining whether the industry needed further regulation, whether customers were at risk of harm or were well informed about the products and whether industry players should be licensed.
An ASIC spokesman declined to comment on the specifics of the review. Street Talk revealed the broader ASIC review last year.
In efforts to engage with the industry the corporate regulator has set up an Innovation Hub to provide guidance to fintech businesses – where relevant – on licensing and other relevant processes.
But McLean Roche Consulting’s Grant Halverson, a payments industry veteran, believes the regulator has been dragging its feet in relation to the fintech sector and the buy now pay later industry, which is fraught with risks.
“ASIC seem to want to close the stable door after the horse has bolted,” he said. “Australia has been late to the game [on regulation].”
The buy now pay later industry – which includes players such as Afterpay, Zip Co and Certegy Ezi-Pay – allows customers to purchase and access the product while paying for it over time. The players involved have differing models including varied thresholds on purchase amounts and late fees, while some levy monthly charges when users are active.
Mr Halverson’s concerns centre on the fact that many of the operators fall outside the National Consumer Credit Protection Act, because companies such as Afterpay, which is run by Young Rich Lister Nicholas Molnar, offer short term amounts and don’t charge interest.
His analysis suggests there are longer term risks around Afterpay not conducting a thorough identity check and charging large late fees, also noting that “vulnerable consumers” had to be made aware of the impact any defaults would have on their credit reference.
“Bad debts are increasing at a higher rate than sales and this is a very concerning trend,” Mr Halverson said. “American Express [Australia] with sales of $58 billion have bad debts at half the rate of Afterpay/Zip which highlights the immature and cavalier approach to credit risk.”
While Afterpay has a credit licence, it is not activated, and the company notes that the bulk of its transactions are via a customer’s linked debit account. Afterpay just this year added external identity checks to its proprietary platform checks, after an under-age customer gamed the system to buy alcohol.
Afterpay executive director and group head David Hancock said the company welcomed ASIC’s review and was actively engaging with the regulator.
“Our business model was not fully envisaged by the existing law as is the case with other technology,” he said. “From our perspective I think we’ve been able to cleary articulate how we are different t… we welcome the review by ASIC just as we welcomed the review by the New Zealand government.”
In New Zealand, a similar broad regulatory review has opted to give the buy now pay later industry reprieve from being brought under the Credit Contracts and Consumer Finance Act, but it may be caught by new regulations as the industry and other technologies evolve.
“There is very limited evidence of harm from them to date, and the products are already subject to protections under the Fair Trading Act. I do not consider they should be brought within scope of the CCCFA at this time,” a NZ ministerial paper said.
“However, in light of the rate of innovation in the credit markets, I propose to create regulation-making powers to adjust the scope of the CCCFA to address harms that arise from new, unregulated products in the future.”
Zip, which runs a different model that allows purchases of larger amounts, has a credit licence and undertakes an identity check and credit assessment of all customers.
Chief Larry Diamond said the company, which views itself as credit card disrupter, participated in the ASIC review.
“We welcome fair and responsible lending practices across all players in this sector,” he said.
Afterpay’s spectacular run as a listed company, since joining the bourse in 2016, has created divergent views on its model and growth trajectory. The stock is up 147 per cent this year, despite retracing some gains.
Still, analysts remain largely bullish, with five of the six that cover Afterpay rating the stock a “buy”. The company has a market capitalisation of almost $3.4 billion.
Zip’s market capitalisation stands at $312 million and its shares have gained 48.6 per cent this year.