Happily Ever AfterPay? Is the “buy now, pay later” sensation cultivating a population of debtors?

 

Australian consumers, collectively, owe over 900 million dollars in buy now pay later debts through start-ups such as AfterPay.[1] The AfterPay service allows consumers to delay payments or pay by instalments over a period of time. Traditionally referred to as “factoring” of accounts receivables in accounting terms, companies sell their accounts for goods or services already delivered to the consumer, to AfterPay at a discount.[2]

Afterpay has not been tested through a full credit cycle, and essentially provides unsecured credit. Technological advancements allow services such as AfterPay to be accessed in store as well as through the ease of a phone app. Unlike traditional factoring arrangements, AfterPay involves the consumer in this process, allowing a “one-touch-shop” to satisfy a consumer’s needs and desires. AfterPay makes 20 percent of its revenue from late payments, with each missed instalment attracting a 10 dollar penalty, with any subsequent missed payments incurring a further 7 dollars each.

There are multiple psychological processes that inhibit debt aversion, and ordinary consumers are not innately wired for pragmatic debt management. Is AfterPay a mere enabler for a quick materialistic fix of goods outside of people’s pay brackets? Or is it the Robin Hood of credit services, allowing access to a better, more convenient method of achieving an aspirational lifestyle?

 

Goodbye Lay-by

 Before the AfterPay phenomenon hit the stores and internet, lay-by arrangements were a fairly standard component of the retail industry. An agreement is considered to be a lay-by agreement, if a product is paid for in at least two or more instalments, and the consumer may only take possession of the product upon the retailer’s receipt of the total product price.[3]

A key factor that differentiates the lay-by system from AfterPay is the absence of interest charges and late payment fees. On a psychological level however, prospect theory dictates that humans are more sensitive to loss than to gain of an equal amount.[4] When applying this theory to the lay-by versus AfterPay models, the need for instantaneous gratification feeds an inherent urge to possess a product in fear of missing out, rather than endeavouring on a seemingly laborious process of depositing payments to obtain the exact same item, at a later date. Furthermore, online retailers who offer AfterPay are capitalising upon this fear-based response, causing people to make snap decisions because they don’t want to feel like they’ve lost out.[5] Amazon for example, often post messages on their home page that imply a sense of urgency in making purchases, such as “Only 2 of these items left in stock”.[6]

The key psychological factor that AfterPay feeds rather than lay-by, is the endowment effect. Specifically, Afterpay encourages an immediate purchase in the moment. The critical moment is the check-out point, and the Afterpay process ensures that consumers don’t have to think too much when they are making the purchase, moving consumers through the steps without them being aware of the puppetry.

Online retailers that steer towards the younger market are aggressive in targeting young adults primed for instantaneous gratification, with retailers such as Boohoo.com advertising their AfterPay services as “Shop Now. Wear Now. Pay in 4”. The key competent in this marketing is the “Now” effect, as consumers are encouraged to envision themselves with a product in their grasp, which is often advertised to be at a lower price for a limited time, rather than factoring in matters such as budgeting. In short, these youthful online retailers have become primed at targeting “wants” rather than “needs”, to an audience that is inherently ill-equipped at debt management.

Furthermore, Millennials are responding positively to the AfterPay trend, with only 41% of the cohort owning credit cards currently, compared to 58% in 2002, with the cohort being wholly incentivised by AfterPay’s lack of interest charges.[7]

What remains, is that consumers are left in an awkward stage of cognitive dissonance, as they inherently know that incurring debt is bad, however are programmed not to think about it, as it causes psychological discomfort that gets in the way of endowment satisfaction.

 

Dysfunction Junction

Wealth is a function of varying levels of assets and debt. Psychological studies have indicated that people with positive net worth feel and are seen as wealthier when they have lower debt, despite having fewer assets.[8] As such, the excess of 900 million dollars in debt to buy now, pay later juggernauts is difficult to fathom.

 A key issue with AfterPay, is the failure to perform credit checks before consumers can sign up to the service. However, AfterPay reserves the right to perform credit checks and to report negatively on consumers’ accounts to credit rating bodies.[9]

This begs the question, should AfterPay function in a manner that is more aligned with financial lenders? The factoring accounting model of AfterPay complicates this issue, and therefore, it’s currently under no obligation to vet high risk debtors. Furthermore, policy makers are struggling to come to grips with the exponential growth of the service. As AfterPay doesn’t charge interest, it is not subject to the National Consumer Credit Protection Act 2009 and accordingly, the service is not required to comply with responsible lending arrangements.[10]

The Chief Executive Officer of AfterPay, Nick Molnar states that the credit model of the service is structured around rewarding consumers for “good behaviour”, which means that “the system slowly provides increased buying flexibility”.[11]

Upon review of AfterPay’s website, the “good behaviour” reward system is difficult to locate. On the website’s homepage, it appears that the reward for repayments on time is the absence of late fees, stating that “you’ll only ever pay the price of the item you’ve purchased.” Furthermore, the website states that AfterPay is more likely to approve a purchase, the longer a consumer has been a responsible shopper. This goal gradient hand-holding appears to be counterintuitive to AfterPay’s mission of “Empowering our customers”, however the rationale behind this method incentivises consumers to pay on time. The risk that may appear though, is the post-reward reset phenomenon where motivation has a tendency to drop to the baseline once a consumer has been rewarded, even if there is a second reward on the horizon.[12]

The lack of application friction has been a driver of AfterPay’s success. To add lending regulations will slow down the rate of new consumers to the sign-up process. However, late adopters of the service will be less resistant to additional checks, while early adopters may feel that the element of vetting hinders the simplistic nature of the service that attracted them in the first place. It must also be noted, that if there are any missed repayments, the consumer’s account will be suspended. This product element may encumber a necessary learning tool of self-discipline that comes with traditional lending models.[13]

 

A population of debtors

AfterPay has epitomised Millennial behaviour, presenting a simple product that gives consumers greater control over their credit spend.[14] The excess of 900 million dollars in debt to buy now, pay later services suggests that constant marketplace stimuli and innate psychological processes manifests in frivolous spending. It is not the responsible consumer that is at risk, but the consumer who accumulates a number of debts by making multiple purchases, or using a number of buy now, pay later services. 

As such, should further regulation be integrated into the service to promote greater attention to responsbile lending? Any regulatory evolution to AfterPay and its peers will impede upon the user-friendly appeal to these services. The ability for consumers to cope with this added freedom of pseudo credit management can only be determined on a case-to-case basis, depending upon a number of behavioural, psychological and categorical variables. The resounding phrase that comes to mind is simply, buyer beware.

 

Clare Venema
File Accountant, Worrells Solvency and
Forensic Accountants, Adelaide
Email: Clare.venema@worrells.net.au
Ph: 08 8214 0513, Mob: 0435 636 969

 

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References:

Abigail B Sussman & Eldar Shafir, “On Assets and Debt in the Psychology of Perceived Wealth”, (2011), Sage Journals, https://journals.sagepub.com/doi/10.1177/0956797611421484

Attorney General’s Department South Australia, “Lay-by agreements”, (2019), https://www.sa.gov.au/topics/rights-and-law/consumer-rights/shopping-tips/lay-by-sales

 

David Chau, “AfterPay: Consumer advocates fear ‘instant approval’ will cause serious financial hardship”, (2017), ABC News, https://www.abc.net.au/news/2017-09-26/afterpay-consumer-debt/8988394

 

David Ross, “AfterPay believes a fear of credit debt by millennials will drive its global growth”, (2019), Business Insider, https://www.businessinsider.com.au/afterpay-stakes-american-expansion-on-fear-by-young-people-2019-4

 

Emory Nelms & Dan Ariely,  “Why don’t people manage debt better?” (2016), Scientific American, https://blogs.scientificamerican.com/mind-guest-blog/why-don-t-people-manage-debt-better/

 

Kelly Emmerton, “Love AfterPay? Here are the traps you should know about”, (2019), Mozo, https://mozo.com.au/fintech/love-afterpay-here-are-the-traps-you-should-know-about

 

Michael Atkin, “Calls for greater regulation of buy now, pay later services like AfterPay and Zip Pay”, (2019) ABC News, https://www.abc.net.au/news/2019-08-15/buy-now-pay-later-services-regulation-afterpay-complaints-zip/11416996

 

Michael Gearon, “Cognitive Biases: Loss Aversion”, (2018), UX Collective, https://uxdesign.cc/cognitive-biases-loss-aversion-925149360f46

Saurav Dutta, “Explainer: How lending start-ups like AfterPay make their money”, (2017) The Conversation, https://theconversation.com/explainer-how-lending-startups-like-afterpay-make-their-money-86477

 

Sophie Elsworth, “Shoppers using AfterPay explodes but some shopper can’t pay back their debts”, (2017), Fox Symes Debt Solutions, https://www.foxsymes.com.au/about-us/news/shoppers-using-afterpay-explodes-but-some-shoppers-cant-pay-back-their-debt


[1] Michael Atkin, “Calls for greater regulation of buy now, pay later services like AfterPay and Zip Pay”, (2019) ABC News, https://www.abc.net.au/news/2019-08-15/buy-now-pay-later-services-regulation-afterpay-complaints-zip/11416996

[2] Saurav Dutta, “Explainer: How lending start-ups like AfterPay make their money”, (2017) The Conversation, https://theconversation.com/explainer-how-lending-startups-like-afterpay-make-their-money-86477

[3] Attorney General’s Department South Australia, “Lay-by agreements”, (2019), https://www.sa.gov.au/topics/rights-and-law/consumer-rights/shopping-tips/lay-by-sales

[4] Emory Nelms & Dan Ariely,  “Why don’t people manage debt better?” (2016), Scientific American, https://blogs.scientificamerican.com/mind-guest-blog/why-don-t-people-manage-debt-better/

[5] Michael Gearon, “Cognitive Biases: Loss Aversion”, (2018), UX Collective, https://uxdesign.cc/cognitive-biases-loss-aversion-925149360f46

[6] Ibid.

[7] David Ross, “AfterPay believes a fear of credit debt by millennials will drive its global growth”, (2019), Business Insider, https://www.businessinsider.com.au/afterpay-stakes-american-expansion-on-fear-by-young-people-2019-4

[8] Abigail B Sussman & Eldar Shafir, “On Assets and Debt in the Psychology of Perceived Wealth”, (2011), Sage Journals, https://journals.sagepub.com/doi/10.1177/0956797611421484

[9] Kelly Emmerton, “Love AfterPay? Here are the traps you should know about”, (2019), Mozo, https://mozo.com.au/fintech/love-afterpay-here-are-the-traps-you-should-know-about

[10] David Chau, “AfterPay: Consumer advocates fear ‘instant approval’ will cause serious financial hardship”, (2017), ABC News, https://www.abc.net.au/news/2017-09-26/afterpay-consumer-debt/8988394

[11] Sophie Elsworth, “Shoppers using AfterPay explodes but some shopper can’t pay back their debts”, (2017), Fox Symes Debt Solutions, https://www.foxsymes.com.au/about-us/news/shoppers-using-afterpay-explodes-but-some-shoppers-cant-pay-back-their-debt

[12] Ran Kivetz, Oleg Urminsky & Yuhuang Zheng, “The Goal Gradient Hypothesis Resurrected: Purchase Acceleration, Illusionary Goal Progress, and Customer Retention”, (2006), Journal of Marketing Research, http://home.uchicago.edu/ourminsky/Goal-Gradient_Illusionary_Goal_Progress.pdf

[13] Damon Callaghan, “What regulation would mean for AfterPay in Australia”, (2018), ECP Insights – Medium Corporation, https://medium.com/ecp-insights/what-regulation-would-mean-for-afterpay-in-australia-528c3a86e283

[14] Ibid.