Afterpay has spent years trying to convince regulators to give it a wide berth; the quid pro quo has just arrived via a code of conduct.James EyersSenior Reporter
The release of the buy now, pay later code of practice on Monday has put regulation of the burgeoning shadow credit industry back on the radar.
Convincing policymakers to give short-term instalment credit a wide berth has been a big strategic focus for the six-year-old Afterpay; its campaigning in Canberra and industry efforts to land this code are impressive. But the potential for more regulation on the global sector – whose main metrics are doubling each reporting period – will remain an ongoing risk for investors.
The code developed with the Australian Finance Industry Association will need to show it has sharp teeth to punish transgressions and convince sceptics, who are arguing that technology players should not be trusted to write their own rules.
While the ongoing intense scrutiny on the big United States tech platforms is at a different level, given the immense reach and power of Facebook, Amazon and Google, there are salient lessons from the US experience, including the dangers of opaque business models that get too big for their boots: just because you make software, doesn’t mean you can stay outside the regulatory perimeter forever.
Like the US tech giants, Afterpay considers itself a “platform” – not just payments infrastructure but a service that connects shoppers and retailers, allowing commerce to take place on the network. Its ambitions to take on major banks with deposits (and in the future, perhaps loan referrals) was clear from its interim results presentation last Thursday.
Given the extent to which regulation has been a risk since the new business model emerged, it’s not surprising Afterpay has taken a keen interest developing the AFIA code of conduct, which will require Afterpay to do no more than it currently does when assessing whether to provide customers with credit.
The industry has in effect been allowed to write its own rules as it falls outside the formal definition of credit in the national credit act because the products don’t charge interest. The main innovation with buy now, pay later, which Afterpay is exporting globally, is that it has made merchants fund the customer’s access to the short-term credit used to drive retail sales.
Many Millennials want nothing to do with credit cards given their high fees and compounding interest. They’ve been attracted to this short-term debt, allowing them to participate in online commerce and use existing debit cards to get their goods right away while deferring immediate payments. Apps offering some variation of this service have proliferated.
Many Millennials want nothing to do with credit cards given their high fees and compounding interest.
Afterpay competes for smartphone and online checkout attention with Humm, Zip, Latitude, Klarna, Brighte, Openpay and Payright. More are arriving; all can add customers very quickly. Now, heavily regulated banks want regulators to reduce their barriers so their own apps can compete with the upstarts.
As they gather customer spending patterns and preferences, analysts are expecting a push towards turning data into revenue. Initially efforts will be based around tools to support customer choices but expect strategies under open banking, feeding data back to retailers, and changes in revenue models such as creating dynamic marketplaces. Companies that control data flows will be in a good position to capitalise on the new economy.
The rise of the sector comes as payments grow in strategic importance, in commerce and geopolitically. Banks, often encumbered with legacy IT systems, and their technology vendors struggle to mimic the flexibility of disrupters.
Regulators, meanwhile, acknowledge fintech is a growing source of systemic risk but realise it’s hard to stand against the rising tide.
Releasing Sezzle’s full-year results on Friday, its chief executive Charlie Youakim described a recent roadshow meeting state regulators in the US, to show them the model (the same as Afterpay’s). Feedback suggests they have bigger fish to fry policing the predatory US payday lending sector.
Afterpay has spent years educating policy makers in Australia about what it does and its lobbying efforts in Canberra, explaining how the interest-free model works better for customers, appear to have largely been accepted.
This is despite protests about costs from retail sector interest groups, and ongoing concerns from consumer groups. But it’s only two years ago that buy now, pay later was lumped by a Senate committee into a probe of payday lenders – the same committee that has called for the development of this self-regulatory code.
The UK Financial Conduct Authority is also examining the sector.
The Australian Securities and Investments Commission and Reserve Bank still have concerns. ASIC thinks the number of customers being charged late fees is too high, while vulnerable customers are spending too much. The Reserve Bank thinks merchant fees are too high.
Treasurer Josh Frydenberg warned regulators against nobbling high-growth start-ups at The Australian Financial Review Banking & Wealth Summit last November, noting “regulators do not carry out their mandates in a vacuum”. Prime Minister Scott Morrison told the Singapore Fintech Festival in December he wants Australia to become a magnet for fintech entrepreneurs.
The quid pro quo of the official support is this new code. Finalising its first version is a big achievement. The code is enforceable and there are multiple commitments to transparency, complaint handling and ongoing improvement.
AFIA says in its blurb the new code “goes above and beyond the law”, but one area that is different is transactions under $2000 – where Afterpay mostly operates – still don’t require customers to provide any data to determine if products are suitable as they sign up.
Consumer groups have argued for years that some users are struggling under multiple buy now, pay later debts and may be prioritising them over other debts, like the power bills or shopping for food. As they say, the players themselves are telling retailers the key reason to sign up is to encourage customers to spend more than they otherwise would.
The code also shows how an unscrupulous operator, working under the buy now, pay later banner, is a risk for everyone. AFIA can’t make start-ups sign up to the code, but those that don’t will need to explain why. And there will need to be a few heads on sticks to provide confidence – assuming complaints are made.
The code also provides hints about the future. Providers have pledged to “consider developments in technology, data, comprehensive credit reporting and open banking as a means of undertaking a process of continuous improvement and developing a more holistic view of our customers”.
This suggests there will be plenty of engineering around gaining consent to receive bank data to help reduce risk. Ironically, it’s the same data that will help to create better, tailored services to take on incumbents bogged in post-Hayne regulation.