Aftermath of Afterpay

Are avocados and Afterpay really responsible for locking millennials out of the property market?

If you haven’t heard of Afterpay, you are probably unique.

Afterpay was started in 2015 to allow customers the opportunity to ‘buy now, pay later’.

Much like layby. Except, the customer is able to receive the goods immediately. The merchant receives the full price of the product from Afterpay.

Customers then have four, equal, fortnightly repayments automatically deducted from their credit or debit card associated with their Afterpay account.

Afterpay is expanding rapidly, including into New Zealand, with companies like Jetstar, Myer and Target using it, subsequently lending legitimacy to the ASX listed company.

Afterpay allows you to enjoy your purchases now.

Afterpay’s payment method is very attractive.

For the merchant, Afterpay explain that they offer “…customers an easy way to pay over time for their purchases, while you (the merchant) get paid straight away. Sell more with no risk”.

Afterpay’s website also claims that customers, 73 percent of which are millennials, spend more per transaction and return more frequently than those who don’t pay with Afterpay.

Afterpay customers tend to become repeat customers.

Afterpay receives 4 percent commission plus 30 cents per transaction from the retailer.

Afterpay then assume all the risk.

Afterpay is attractive for both the merchant and the customer. Making it a seemingly win/win scenario.

The merchant wins, especially small, online companies. They don’t need to assume any risk, nor do they need storage for products placed on layby.

The customer wins as they are able to purchase and receive a product immediately, without the paperwork, background checks or fees and interest rates associated with credit cards and loans. Afterpay, however do charge customers late fees for payments missed. With an additional $7 fee if the payment isn’t settled within seven days.

Is this model financially responsible though?

The Australian retail industry is struggling. And Australians are too with record levels of household debt.

Afterpay is seen by many as an 'affordable' loan.

Afterpay is viewed by consumers as a welcomed break to the crippling credit card with their 20-25% interest rates.

If a customer misses one or all of their payments, their Afterpay account is suspended until the debt is paid. A feature lacking on a credit card, where the debt can keep on growing, quickly becoming seemingly insurmountable.

Afterpay only allows purchases up to $1500. So you might have to wait and save for that $5000 TV. This limit is one of Afterpay's endearing features. Debt seems small.

With 1.1 million customers, only 0.07% paid late fee. Afterpay seems to attract financially responsible customers, very few defaults. If you do default, considering all the fees, that $100 handbag, can end up costing $168. $168 still seems pretty manageable, in comparison to a pay-day loan or credit card.

Afterpay, however, has its drawbacks.

They explicitly state on their website that they “…cannot ensure that a Retailer you are dealing with will complete the transaction”.

Afterpay with a tiny online retailer can be risky.

But when you’re buying from JB HI FI or Pillow Talk you can be confident they will deliver the goods. But that little online boutique shop is a little bit more of a risk. Especially when you consider that any disputes you may have with Afterpay can take 45 business days to resolve, that’s just over two months!

Also, if you need a refund, Afterpay refund the retailer first, then you deal with the retailer. So the claim that Afterpay take all the risk, isn’t entirely accurate, as you, the customer also have to assume some risk and responsibility.

With that risk and responsibility as the customer, also comes the understanding of what Afterpay can do to your credit rating.

Make no mistake, Afterpay and similar online payment options, are a loan.

Whilst it is marketed as being a manageable, no credit checks way to own the latest and greatest now. Amie Tennant, at Future Finance Group, points out that actually in their terms and conditions, Afterpay can “…directly or through third parties, (make) any enquiries we consider necessary …This may include ordering a credit report…”

Afterpay users may have to jump a few more hoops with some lenders.

Amie has seen client’s credit score decline after using Afterpay. Lenders haven’t yet refused loans for Future Finance Group’s clients, but they do make them jump through a few more hoops before giving approval.

That old adage 'if it seems too good to be true...' is very appropriate when considering using Afterpay. Amie’s advice to anyone seduced by the idea that they can buy now, own now and pay later, is to “…definitely avoid it if you are thinking of borrowing money”.

Whilst the jury is still out on avocados, it seems they have returned a verdict on Afterpay.

Turns out that fancy Avocado Toast, probably isn't the culprit for your lack of home ownership.