There’s no doubt the buy now, pay later (BNPL) phenomenon has changed the payments landscape in Australia. Research by Roy Morgan in September 2019 found 1.95 million Aussies had used at least one BNPL service – such as Afterpay, Zip Money or Zip Pay – at the shops or online in the past year. Meanwhile, the use of traditional credit cards declined about 3% during that time.
Despite its rapid expansion and popularity, the BNPL industry hasn’t escaped scrutiny, with some providers grilled at a Senate inquiry earlier last year about how vulnerable consumers could be accumulating more debt and be worse off financially by using these payment methods. It resulted in the Federal Government passing legislation that increased the regulator ASIC’s ability to intervene in the sector in future.
But before we get too far into the nitty-gritty of BNPL services, what are they?
What is “buy now, pay later”?
BNPL is similar to the older lay-by system you might have used to buy a toy at Big W, for instance. Lay-by is where you ask the store to put goods aside for you and then pay for them in two or more instalments, before taking your purchase home. However, BNPL services involve the BNPL provider paying the retailer for goods, allowing users to take them home immediately and then pay for them in instalments, which go to the BNPL service instead of the store. The services can be used at selected retailers in-store or online.
More and more retailers are starting to offer the service in Australia, allowing customers to buy things without having to take out a traditional loan, credit card or pay interest (in some cases). There are often late payment fees attached, however, and the payment method could wind up costing you the same as taking out a credit card or personal loan.
You might think a service like BNPL would mainly be used to buy relatively low-cost clothes and accessories, but this is not necessarily the case. With Afterpay, for instance, you can pay for more expensive goods and services such as IVF, purchasing glasses or contact lenses, flying overseas or going to the dentist.
How does buy now, pay later work?
BNPL services are offered at certain retailers as another method of payment, rather than using your typical cash, debit card, credit card or PayPal account.
You can apply to use BNPL via the provider’s app or website and then log into your account during an online transaction or display a purchase code via the app in a store. Alternatively, you could have an account set up for the first time during the transaction process at a retailer and wait to receive approval for your spend amount from the BNPL provider. Approvals for BNPL are generally processed shortly after you provide your details.
Whether or not you can use BNPL will depend on if the retailer is partnered with the service.
The repayments you pay would be deducted automatically from your card or bank account you have attached to your BNPL account. This happens at regular instalments – commonly fortnightly. If you don’t have enough money in your account at the time of the deduction, the BNPL provider may charge you a late fee. Some BNPL services may also charge additional fees or interest if you fail to fully repay a purchase within a certain timeframe.
Compare buy now, pay later providers in Australia
Below are some of the buy now, pay later providers in Australia, and some information about how they work and what they cost.
Customers can buy clothing, baby products and more, as well as pay for Airtasker jobs.
Shop in-store: Open your Afterpay app to scan your barcode for payment at the checkout, where you will be charged the first instalment on the spot.
- Pay in four evenly split, interest-free fortnightly payments.
- Late payment fee of $10 applies, but it does not accumulate above 25% of the purchase price or $68 (whichever is less), or above a single $10 fee for purchases under $40.
Shop in-store: Open the Zip Pay app to have your barcode scanned. If the order amount is greater than your available funds, Zip says you may be able to get a credit limit increase or split payment methods with the retailer, but this is not guaranteed, so it could still be worth thinking about what you can realistically afford when using Zip Pay.
Credit limits: $350, $500 and $1,000.
- Pay for all the purchases you make during a month on the first day of the following month, automatically via direct debit.
- If you make your minimum repayments but don’t pay your balance back in full by the end of the following month, a $6 account fee will be charged.
- There’s also a $5 late fee if you don’t meet your minimum monthly repayments within 21 days after they’re due.
- You can make a repayment schedule that suits you (weekly, fortnightly or monthly) if your monthly minimum spend was more than $40.
Shop in-store: Open the Zip app to have your barcode scanned. If the order amount is greater than your available funds, you may be able to get a credit limit increase or split payment methods with the retailer.
Credit limits: Above $1,000. You can request a credit limit decrease, or increase of up to or above $5,000.
- Monthly, fortnightly or weekly repayments at an amount of your choice, paid via direct debit. Additional payments are accepted.
- No interest for three months, but an interest rate of 19.9% p.a. after this interest-free period ends.
- Establishment fee of $0-$299 when you sign up.
- Monthly fee of $6 if there is an outstanding balance.
- Late fee of $15 if you don’t make your minimum repayment within 21 days of the due date.
- Bank dishonour fee of $5 if bank details were incorrect or there were insufficient funds.
- Processing fee of 1.25% on each bill.
- Once customers – who must be at least 18 years-old – are verified and approved, Klarna will carry out a credit check at each time of purchase to determine your ability to make payments. Klarna says this is a “soft credit check” which will not impact your credit score or credit report.
- For stores that haven’t partnered with Klarna, a ‘ghost card’ linked to your personal credit or debit card will need to be created in the app. Customers can use the virtual, single-use, prepaid card for purchases and payments, and set the dollar amount they wish to spend. Card transactions are capped at $1,000, and so is the total amount of money you can have on a ghost card at once. You will need to enter the card details Klarna provides you at the checkout to complete a purchase using the ghost card.
- Customers can make BNPL purchases online with any retailer through the Klarna app, or pay at non-partnered stores that have Visa checkouts with a ghost card.
- Commonwealth Bank customers can also access Klarna via their CommBank app.
- A minimum spend of $35 applies to purchases using Klarna.
- Klarna says customers can receive price-drop notifications and exclusive discounts via the service.
- Klarna lets you pay in four fortnightly instalments with no interest using its BNPL function. The first payment will be charged when the seller confirms your order.
- Klarna late fees are dependent on the amount spent:
- $35 to $60 spend incurs a $3 late fee, capped at $9 per order
- $60 to $100 spend incurs a $5 late fee, capped at $15 per order
- $100 to $200 spend incurs a $7 late fee, capped at $21 per order
- $200+ spend incurs a $15 late fee, capped at $45 per order
Debit card: Splitit requests authorisation from your institution to reserve the total purchase amount from your account, and then at the time of purchase you’ll be charged the first payment. The entire amount is held on your debit card temporarily and released within five business days.
Splitit’s website indicates the company makes its money by charging merchants fees to use its services.
Shop in-store: Open your Openpay app to scan your barcode for payment at the checkout, where you will be charged the first instalment on the spot, which is usually 20% of the purchase price.
Spend amount: Up to $15,000.
- Payments charged fortnightly over either 2-3 months, 6 months, 9 months, 1 year or 2 years, depending on the spend amount.
- No interest charged.
- Fees of $0.50 per fortnight for purchases up to $1,000, paid over two to three months. While spend over $1,000 and up to $15,000, you will instead be charged a $25 start up fee and then $2.50 per fortnightly repayment (with repayments ranging from six months to two years, depending on the spend amount).
- A management fee may be charged on each repayment as well, depending on the merchant.
- Default fee of $9.50 if you miss an instalment.
- Referral fee of $19.50 if your payment is late for eight days or more.
- Fortnightly payments, typically spread over six weeks.
- No interest or processing fees.
- $10 failed payment fee charged if you miss an instalment, but it will be waived if you pay it within 48 hours of your original due date.
- You can reschedule your payments for free the first time, but it’s $5 per reschedule after that.
Shop online: Choose Humm as your payment method at participating retailers and pay your first instalment upfront.
Shop in-store: Display your Humm barcode in the app to staff at the retailer and they will be able to access your pre-approved spend amount.
Spend limits: Up to $2,000 for “Little things” or up to $30,000 for “Big things”.
- Spends of up to $2,000 can be repaid in either: 5 fortnightly repayments with a $6 late fee applicable, or 10 fortnightly repayments with an $8 monthly fee and $6 late fee applicable.
- Spends of up to $30,000 can be repaid in 6-60 months, with an $8 monthly fee, a $35-$90 establishment fee, a $22 repeat purchase fee and a $6 late payment fee applicable.
Step 2: Apply for the 0% interest payment plan online or via the app.
Step 3: Payment plan activated once the vendor has completed your job.
Payment plans: You can apply for a 0% interest plan for payments of up to $30,000. You can also request pre-approval for payments of up to $15,000. Additional fees and charges may apply.
- $1 weekly account keeping fee
- $4.99 late payment fee
- Total fees capped at $49.90 per year, which is equal to 10 missed repayments
- Pay in six interest-free payments, once per week. The first payment is charged once you complete your order.
- Zero upfront fees charged.
- A $10 late fee applies to each missed payment.
Shop in-store: Use your digital card stored in your Digital Wallet to make transactions in-store at merchants that accept Mastercard transactions.
Credit limit: A $150 minimum credit limit applies, while the maximum credit limit is determined according to Bundll’s discretion.
- No interest
- $10 late fee, which will be waived if you pay the amount due on the day after the payment date.
- Late fees will be capped at one fee for a missed payment, regardless of the number of payments that may be due from the customer.
- Pay off purchases within 14 days or “snooze” payments for another two weeks for $5.
- Roll purchases into a “superbundll” and pay it off in six fortnightly payments.
Shop online: Choose Latitude Pay as a payment option at the online checkout, apply for an account if it’s your first time (approval is typically instant) or login, then pay 10% of the purchase price upfront and the rest later.
Shop in-store: Create an account online and ask to use Latitude Pay at the checkout. You will receive a text message with a link to enter your payment details, then wait for approval before paying the 10% upfront charge.
Credit limit: Up to $1,000.
- Pay 10% of the purchase price upfront and the remainder in nine weekly payments.
- No interest.
- A $10 late fee applies if you miss a payment.
Shop online: Choose Payright as your payment option, complete the application process (which typically takes a couple of minutes) and get instant approval.
Credit limit: Up to $10,000.
- Pay in interest-free fortnightly or monthly instalments with terms of up to 36 months.
- Establishment fee of $0-$89.95, which is added to the loan amount and payable over the loan term.
- Monthly account keeping fee of $3.50.
- There is a payment processing fee of $2.95 which is added to each repayment.
- Late payment fee of up to $12.95 which will be charged separately, in addition to the overdue payment.
Are buy now, pay later services worth it?
BNPL services can be convenient forms of payment for some, and may appeal to people who want to spread out their payments but still receive a product instantly, without having to use a credit card. But there could also be some of the following significant financial risks involved:
People who may already be financially vulnerable are relying on these services the most
Roy Morgan Research in 2019 found people aged between 14-34 accounted for the biggest pool (55.9%) of Australian BNPL users, of whom most tended to be employed, but earning an average or relatively low wage.
ASIC’s first review of the sector in 2018 found more than two in five (44%) users of BNPL had an annual income of less than $40,000, and of those, almost 40% described themselves as either students or in part-time work. It also found many people using these payment methods tended to delay paying bills, overdrew accounts or borrowed money from friends, family or another loan provider.
The Consumer Action Law Centre reported in 2018 that it had received an increased number of calls from people with BNPL debts, many of whom were juggling numerous other debts such as payday loans, credit cards and utility bills.
Products like Afterpay might be advertised as 'buy now, pay later' but for many people they become 'buy now, debt later' as the late fees rack up. Our @gerardbrody explains how these products operate in a regulatory loophole, meaning they lack serious consumer protections. https://t.co/e9bvvWCsIZ
— Consumer Action (@consumer_action) December 17, 2019
While most of the services are interest-free, costs can still quickly add up
Afterpay, for instance, makes almost 20% of its profit from late fees, with the remainder coming from surcharges on its 20,000 retailers. It has now implemented a cap on late fees following scrutiny of its business model by consumer groups and regulators, cutting those fees off at 25% of the purchase price or $68 (whichever is lower).
Most of the BNPL services listed in this article say on their website that they would notify customers of upcoming payments, and suggest getting in touch if you think you might be unable to make a payment on time.
BNPL services are not subject to the National Credit Code
What this means is that customers who use these services do not have the same kind of protection as they do with credit cards or personal loans, which are regulated by the Code. It also means there is no requirement for a BNPL service provider to adhere to responsible lending obligations, such as by checking if you can actually afford to make the repayments.
There is, however, a voluntary code of conduct in the works for BNPL providers that could help protect consumers, but as an industry code, it would not substitute for actual regulation. The draft of this code was released on 29 January, 2020.
The Australian Financial Complaints Authority had received more than 250 complaints in the eight months to the end of June 2019, all in relation to unauthorised transactions, negative impacts on credit ratings and incorrect fees in relation to the use of BNPL services.
Popular 'buy now, pay later' providers are facing great scrutiny with increasing calls for them to conduct bank-style checks before customers are approved. The chief executives of @AfterPayAU and @Zip_AU have appeared before a Senate Inquiry. @GemmaActon #7News pic.twitter.com/BNdf3Wbyx8
— 7NEWS Sydney (@7NewsSydney) January 22, 2019
What’s more financially responsible: Credit cards or buy now, pay later?
Canstar surveyed 2,061 Australian adults in November 2019 and asked them what form of payment they felt was more financially responsible: a credit card or buy now, pay later services such as Afterpay and Zip.
More than two-thirds (68%) of Australians said they viewed credit cards as more financially responsible. This could be a reflection of the high number of credit card holders across the country. The Reserve Bank of Australia’s latest data shows in November, there was $27.2 billion in personal credit card debt accruing interest.
The younger generations and females had a more favourable opinion of buy now, pay later services. Canstar’s research showed 45% of Millennials and 37% of Gen X thought buy now, pay later was more financially responsible than using a credit card, while only 22% of Baby Boomers and 15% of the Silent Generation thought so. And 39% of women classed buy now, pay later as a better option, compared to 22% of men.
Canstar money expert Effie Zahos said whether you use a credit card or a BNPL service, both allow you to do the same thing, and that is to rack up debt.
“And given fashion accounts for the lion’s share of BNPL purchases at around 52%, one can safely say it’s mostly bad debt,” Ms Zahos said.
Do buy now, pay later providers do a credit check?
Most buy now, pay later providers do not perform a credit check to see whether you could afford to make repayments, and simply require a validation of your identity, but some do.
It’s worth noting, however, that your credit score may be affected by using the services, according to ASIC. This is because if you take on more credit than you can afford and can’t keep up with repayments, your BNPL provider may report any late payments or defaults to credit reporting agencies.
But whether or not a credit check is conducted and whether your credit score will be impacted will largely depend on the BNPL platform you are using. That’s why it’s important to read their terms and conditions carefully before deciding to sign up or make a purchase with a BNPL provider. Here is how some BNPL providers differ, for example:
- Afterpay says it may order a credit report and perform “other repayment capability checks” to assess your ability to make payments, and may report any negative activity on your Afterpay account to credit reporting agencies. Such activity could include late payments, missed payments, defaults or chargebacks.
- Zip says it may perform a credit check upon application to the service, to confirm you can make repayments. The checks are actually performed by third parties Equifax or illion.
- Splitit claims credit ratings will not be impacted at all by declined payments and there is “no impact” on customers’ credit scores.
- For some purchases with Openpay, customers may be asked to consent to a credit check before making the purchase.
- Laybuy performs a credit check on all new customers who register for its payment platform. Any payment default may result in its debt collection service contacting you, and your credit score may be affected.
- Bundll says it won’t check your credit history, but warns your credit score could be impacted if you have selected a credit card as your payment source with Bundll and then miss a payment on your credit card.
If you’d like to read more information about buy now, pay later services, you may be interested in the following articles:
Feature image source: rosstomei (Shutterstock)