‘A Crisis is Coming’: Buy-Now-Pay-Later Services Target Vulnerable Young Women
Thursday, 14th March 2019 at 8:50 am
Buy-now-pay-later schemes like Afterpay have revolutionised the way Australians shop. But as Luke Michael reports, these services are also sending vulnerable young women into vicious cycles of debt that follow them long after they stop spending.
The thought of living her life in debt is what Jessica* fears the most.
Sitting in a cramped Salvation Army homeless refuge with her two-year-old son, Jessica doesn’t know how she will be able to pay her car rego costs or daycare fees, let alone her mounting debt payments.
But after watching her parents go through their lives in debt, it’s the last thing she wants her and her son to experience.
The thought of it all makes the 19-year-old feel queasy.
“It’s just so hard and I don’t know what to do. I’m constantly stressing and getting anxious about it because I don’t want to end up how my parents were,” she tells Pro Bono News.
Jessica owes hundreds of dollars from her time using buy-now-pay-later service Afterpay, and is paying it off bit-by-bit to a debt collector.
While buy-now-pay-later schemes seem like an easy way to buy clothes, makeup or even flights when you’re a bit short on money, experts warn vulnerable women like Jessica are increasingly falling into crippling debt because of it.
Peter McNamara, the CEO of financial inclusion charity Good Shepherd Microfinance (GSM), tells Pro Bono News around 70 per cent of buy-now-pay-later clients are women.
One client provided the charity with a 90-day bank statement containing 288 buy-now-pay-later transactions totalling $5,600.
GSM said this case demonstrates the large amount of credit that can be accessed through buy-now-pay-later services with no verification of income, credit check or assessment of the capacity to repay.
McNamara also recalls one female client who spent 45 per cent of her income on these schemes, a cycle of behaviour McNamara warns could be extremely destructive.
“There is a cliff coming for so many people, but particularly young women whom this product is designed and targeted for,” he says.
McNamara adds that charities like GSM are seeing a huge increase in demand for their services because of buy-now-pay-later schemes, which is putting a drain on the sector.
Personal finance writer @sophieelsworth on millennial spending: A lot of people are now signing up to buy now, pay later schemes like Afterpay.
It comes down to instant gratification, but what are the financial consequences?
— Sky News Australia (@SkyNewsAust) May 5, 2018
Jessica first turned to Afterpay in June last year, after experiencing domestic violence at the hands of an abusive partner.
She left the relationship for her own safety, but this meant the loss of a second income for her family.
Suddenly Afterpay – which allows you to pay for purchases over four equal instalments, due every two weeks – seemed an attractive option when she needed to buy the necessities.
The Australian company has partnered with over 20,000 Australian businesses and can be used to purchase almost anything, from toys and clothing, to alcohol and food.
“I think they want to make you buy more than what you can afford.”
Jessica started using it to buy presents for her son’s birthday and when he needed things like new shoes.
“I thought it was a good idea at the time because you pay a small amount at the start and then you get to take it home straight away. But you don’t think about the long term,” Jessica says.
She continued to used Afterpay – and on one occasion buy-now-pay-later competitor Oxipay – until she found herself “in over her head” and swimming in debts nearing $1,000.
While she tried hard to not fall into debt, the need to prioritise more pressing costs like daycare, gas and electricity, meant she couldn’t afford to pay back Afterpay.
Jessica is currently on the Parenting Payment and the Family Tax Benefit, and acknowledges she was borrowing more than she could afford given her welfare income.
“The limit Afterpay gave me was, I think, just over a grand. Considering the money I earn from Centrelink, it was obvious I was not going to be able to pay that back,” she says.
Jessica wants buy-now-pay-later services to be better regulated and for more safeguards to be put in place to protect vulnerable people like her and her friends – all of whom she says are using Afterpay.
McNamara agrees, and says buy-now-pay-later providers needed to assume a level of responsibility for who they give lines of credit to.
Corporate regulator ASIC recently found that one-in-six buy-now-pay-later customers have either become overdrawn, delayed bill payments or borrowed additional money to meet their payments.
“The evidence is there that a crisis is coming, in particular for young women, but it’s avoidable, that’s the frustrating thing,” McNamara says.
“We can avoid these issues if the government and ASIC take action to make sure these organisations are behaving in the best interest of the customer.”
GSM wants a requirement for buy-now pay-later services to comply with responsible lending obligations.
This would mean verifying people’s income and identification, and assessing their ability to repay the loan.
He warns that if no action is taken, people will get into high levels of debt, and notes that most of the banks were now considering people’s buy-now-pay-later transactions as part of mortgage applications.
These issues were discussed during a recent Senate inquiry, which examined whether Afterpay and other buy-now-pay-later providers should be treated as a lender and regulated under national consumer credit protections.
Because Afterpay doesn’t charge interest, but generates revenue from commission paid by merchants, it has stayed outside of the credit code’s scope.
The Senate inquiry’s final report did not recommend expanding national consumer credit protections to include buy-now-pay-later providers, but said an appropriate regulatory framework for the sector should be discussed by the government and ASIC.
It said the sector’s regulatory framework should “appropriately consider consumers’ personal financial situations”.
Afterpay has also supported legislation before Parliament which would extend ASIC’s product intervention powers to cover buy-now-pay-later services.
Afterpay has taken Australian shoppers by storm but for many it’s causing huge problems, leading to calls for tougher regulations on the ‘buy now, pay later’ industry. pic.twitter.com/LeSCKTjTQh
— Sunrise (@sunriseon7) December 1, 2018
The company has defended its business model in the past by pointing out that unlike payday lenders and traditional credit, Afterpay does not benefit when people fall behind on payments.
Afterpay said 95 per cent of its transactions incur no late fees and that it immediately suspends its service to a customer if a single payment is late.
It also has a Hardship Policy that seeks to help struggling customers by waiving late fees and postponing payments.
An Afterpay spokesperson tells Pro Bono News the service does not trap people in revolving debt.
“We have inbuilt customer protections, including capped late fees, which are relevant to our business model and to taking a responsible approach,” they say.
“We know these protections work, because Afterpay’s gross loss rate currently sits at less than 1.5 per cent.
“This is close to half of others in the industry who perform credit checks, and multiple times less than payday lending products that are fully regulated by the National Credit Code.”
Jessica says she wouldn’t encourage others not to use buy-now-pay-later services, but believes people need to think very carefully when making purchasing decisions because it’s “just so easy to use”.
She moved into Salvos accommodation about a month ago after being kicked out of her private rental on short notice. While she doesn’t blame Afterpay for being homeless, Jessica admits her debt issues have contributed to her current plight.
She knows the motel-style living is not a good environment for her son, who she says is “locked away in a room pretty much all day every day”.
But firstly she just wants her debt cleared, and she is working with support workers and a financial counsellor to help her sort through her money problems.
“I’m 19… I’m too young to have problems with debt,” she says.
“I am just waiting for a house because I want to be in my own stable accommodation like I used to be. I hope that will happen soon.”
*not her real name.