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ASIC review raises questions about future of payments

Earlier this year, the Australian Securities and Investments Commission (ASIC) launched a review of the buy now, pay later industry to determine whether it requires further regulation, with the aim of protecting Australian consumers from potential financial risk as well as ensuring that the major players are properly licensed.

ASIC’s report is expected to be made public later this year, according to AFR’s Street Talk, but some of the larger players have independently confirmed their assistance with the corporate regulator’s review of the industry.

Given the number of retailers that offer these payment solutions to consumers, any potential regulation is sure to have a knock-on effect on their ability to process payments and, ultimately, service customers. So, what’s the state of play in this relatively new industry?

Sector hits its stride

Since the launch of Afterpay in 2015, when the buy now, pay later industry in Australia arguably hit its stride, major retailers have embraced the buy now, pay later trend in droves.

While Molnar was not first to the market, he created a model that is now used by the majority of the industry, albeit with some differences depending on the target audience. Openpay, a buy now, pay later competitor, was launched in 2016 (executive chairman Avi Schechter pictured above), whereas ZipMoney was launched in 2013.

What these providers have in common is a payment model that has proved attractive to younger customers, as it allows them make larger purchases and spread the payments over a set amount of time. If the customer pays on time, they don’t necessarily pay anything beyond the price of the item; though certain fees may apply to transactions over a set amount.

Buy now, pay later service providers typically do not make significant money from these fees, but rather, retailers pay them for the privilege of offering these payment options.

According to Australia Post’s Inside Australian Online Shopping report 2018, buy now, pay later payments accounted for 7.7 per cent of total online goods spend in 2017, with 57 per cent of these payments taking place in fashion.

However, providers say there is significant room to grow.

“The addressable market within the verticals we are in is over $300 billion, and we as a collective industry are not even close to 10 per cent of that,” Openpay’s chief revenue officer Dion Appel says. “We’re really at the early stage of it.”

Openpay operates in over 4000 point-of-sale locations in Australia, and Afterpay has attracted over 2.4 million customers and nearly 20,000 merchants.

A majority of customers fall into the millennial or Generation X demographic, with over 58 per cent of Openpay’s customers falling into Generation X. Afterpay notes that its average customer is around 33 years of age.

The combination of the technology, as well as the younger demographic, has resulted in increased basket sizes and repeat purchases for many retailers that offer the service.

“[These customer’s] basket size is double the basket size of our normal transactions,” Darron Kupshik, managing director of Global Retail Brands, which operates House, Robins Kitchen, Pet House and Your Home Depot, and offers Openpay and Afterpay at checkout.

Black Milk Clothing and Cue Clothing have also reported seeing higher average transaction values after offering buy now, pay later options.

According to Deloitte partner and payments advisor practice lead Richard Miller, the relative popularity of these services can be attributed partly to their ease of use.

“The ability to, in particular along the millennial segment, access a bite sized payment option that might enable a larger purchase or defers the payment across more [time] obviously makes it easier or psychologically more approachable to make certain purchases,” Miller says.

This is particularly attractive to the millennial and Generation X consumer, who may have a harder time accessing traditional sources of credit to make these purchases.

“They tend to be earlier in their career, or they might still be doing a combination of study and part-time work… but they don’t
necessarily have the constant full-time jobs that would qualify them for a credit card,” Miller explains.

Exemptions under review

However, the potential incoming regulation may make access to buy now, pay later products more difficult to maintain. Currently, these options utilise exemptions in Australia’s credit laws, which are now under review by ASIC.

“We are exempt from the national credit code which governs the conventional credit products, credit cards and payday lenders,” Openpay’s Appel says.

“[Our model has] never been regulated by the national credit code, but it does have two commonly used exemptions that, depending on what product Openpay is using, [allows us to lend between] $50 to $20,000. We do fall within a couple of those exemptions.”

Should these exemptions be rescinded, it could impact their ability to charge minimal fees or interest rates on purchases made
through their services.

However, buy now, pay later providers tell IRW that they aren’t worried.

“I think for us, we’ve understood where the regulatory direction was going from [its] inception,” Zip co-founder and chief operating
officer Peter Gray says.

“ASIC was very clear on its focus on responsible lending, and those sorts of obligations, and making sure that customers were
suitable for each of the products they were signing up for, so we’ve built our product stack and our technology to deal with that and be
market leaders.

“So, should an outcome of the inquiry be increased regulation, we’re well placed for business as usual. It could, in fact, [become]
a competitive advantage.”

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