Consumer: Shoppers paying $10m in buy-now-pay-later late fees

Thursday, 23 September 2021

New Zealanders are paying more than $10 million a year in late fees for buy-now-pay-later services that are advertised as free for shoppers to use, a Consumer NZ survey has found.

Buy-now-pay-later services such as Afterpay, Laybuy, Zip and Humm have become increasingly popular in recent years.

They charge merchants a fee of up to about 5 per cent to offer the service to customers, but do not charge shoppers any interest.

However, they charge late fees when people fall behind. Laybuy charges an initial default fee of $10, followed by another $10 a week later up to a maximum $40. Afterpay charges an initial $10 plus $7 seven days later. The maximum fee is 25 per cent of the order cost or $68, whichever is less.

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In Afterpay’s most recent financial results, it said late fees represented less than 10 per cent of its total income, down from 14 per cent in the 2020 year and 19 per cent in 2019. Laybuy said its default rate had fallen year-on-year from 4.1 per cent to 2.4 per cent.

Consumer NZ’s survey found 40 per cent of New Zealand shoppers were using the part-payment services, and 14 per cent had paid late fees.

“Based on the amount charged, we estimate fees are likely to add up to more than $10m a year,” chief executive Jon Duffy said.

Consumer NZ’s survey found buy-now, pay-later was particularly appealing to younger shoppers. Those aged 18 to 29 were more likely to be regular users, with clothing and footwear the top purchases.

However, close to one in five consumers were using the services to pay for essentials, such as groceries and car repairs.

Buy-now, pay-later customers aged 35 to 44 and single parents were more likely to have done so. They were also more likely to have incurred late fees.

Consumer NZ is calling for buy-now, pay-later services to be regulated under the Credit Contracts and Consumer Finance Act.

“Unlike other lenders, buy-now, pay-later companies aren’t covered by the act. That means there’s no legal obligation on them to ensure their lending is responsible and suitable for their customers,” Duffy said.

Buy-now, pay-later customers also didn’t have a right to a cooling-off period.

“With other products bought on credit, you get a cooling-off period where you can cancel if you change your mind about the purchase. But that’s not the case with buy-now, pay-later.”

Duffy said 55 per cent of respondents said they had bought things they did not really need because they had access to easy credit.

“That says quite a lot to me. You should buy something because you need it, not because there’s an easy option of credit.”

People probably did not think about the fees they might encounter, he said, because they did not expect not to be able to make the payments.

Duffy said while the schemes were a welcome competitor for credit cards, more scrutiny was needed.

“The reality is these products are competing directly with credit cards and that’s great – banks are printing money on credit card interest so anything that can challenge that model and see interest rates on credit cards drop as a result is fantastic for consumers. We support that. The danger is that all the hard-fought protection around credit card lending and the legal obligations to make sure the person to whom you are offering credit can service that don’t exist with buy not pay later.”

The Ministry of Business, Innovation and Employment is putting together a discussion document on the sector and what could be done to reduce the risk of financial harm.