ASIC warns of buy now, pay later harm but stops short of tighter regulation

Australia's financial regulator has documented a troubling pattern: one in five people using buy now, pay later services are missing payments, and the companies are profiting handsomely from it. Over a single year, six major providers—Afterpay, Zip, Humm, Openpay, BrightePay, and Payright—collected $43 million in late fees alone. Yet despite this evidence of consumer harm, the Australian Securities and Investments Commission has chosen not to recommend that these companies face the same regulatory oversight as credit card issuers.

The buy now, pay later sector has exploded. The total credit extended nearly doubled in twelve months. Transactions jumped from 16.8 million in the 2017-18 financial year to 32 million the following year—a 90 percent surge. The number of active accounts grew 38 percent. This rapid expansion has coincided with a shift in how Australians manage debt. People using buy now, pay later are significantly more likely to carry credit card balances, with 26 percent more of them paying monthly interest compared to other cardholders. Many are maxing out their credit limits, suggesting they are layering multiple forms of debt on top of one another.

The human cost is becoming visible. ASIC's research found that some consumers are cutting back on essentials—meals, basic necessities—to keep up with their buy now, pay later payments. Others are taking out additional loans just to stay current. Nearly half of those cutting back on essentials were under 30. Young Australians dominate the user base: people under 35 accounted for 61 percent of all transactions in 2018-19, but represented 67 percent of those hit with late fees. Rosie Fisk, a financial counselor in Canberra, has watched this unfold in her practice. Her clients struggling with buy now, pay later tend to be young, on low incomes, or supporting families on a single wage. They buy clothing and shoes, or use the services to bridge gaps when unexpected expenses hit. When they juggle multiple platforms and miss a fortnight's payment, the late fees compound the problem. Some face multiple late fees on a single transaction—45 percent of transactions that incurred a late fee were hit with more than one.

The business model itself creates perverse incentives. Late fees and merchant fees are the lifeblood of these companies. For Afterpay, late fees made up 20 percent of revenue in 2018-19. For others like Zip, fees from customers—not merchant commissions—drove most income. The faster the sector grows, the more people miss payments, the more revenue flows in. ASIC acknowledged the conflict but stopped short of demanding change. The regulator said it would not recommend that buy now, pay later providers be regulated like credit card companies, despite warnings from consumer advocates that this is simply credit by another name, allowing people to accumulate debt without the protections that apply to traditional lending.

Instead, ASIC is relying on two softer mechanisms. New design and distribution obligations will take effect in October 2021, requiring companies to consider whether their products are suitable for their customers and to review whether high late-fee rates or patterns of missed payments suggest their product design needs to change. The industry is also developing a voluntary code of conduct, though the rollout has been delayed until March 2021. Consumer advocates are skeptical. Gerard Brody, chief executive of the Consumer Action Law Centre, pointed out that a self-regulatory code covers only eight businesses and does not bind new entrants—and new providers are appearing weekly. He cited the banking royal commission as evidence that codes of conduct alone do not protect consumers the way the public expects.

One case illustrates the gaps. Susan Carty purchased hearing aids for her son through a Melbourne retailer and was signed up for a payment plan without being clearly told it was through Humm, a buy now, pay later service owned by Flexigroup. She did not read the fine print on a Friday evening and only discovered the $8 monthly administration fee when an email arrived. Later, her account was hacked and someone made $1,500 in fraudulent purchases at Myer. When she reported it, Humm demanded she file a police report, provide two forms of identification, and make a statutory declaration—treating her like a suspect rather than a victim. She had to escalate to the Australian Financial Complaints Authority before Humm removed the fraudulent charges and improved security. Carty's view is clear: these companies are extending credit and should be regulated accordingly. "They have systems that are obscure," she said. "These places can do really serious damage to vulnerable people."

Flexigroup's chief executive, Rebecca James, defended the company's practices, saying buy now, pay later offers affordable and flexible financing and that Carty's case was resolved within four days. She said the hacking was exceptionally rare and that the company now uses two-step verification. But the broader question remains unresolved. As the Government considers winding back responsible lending laws, consumer advocates worry that young Australians will be pushed toward credit cards and personal loans if buy now, pay later tightens—leaving them with fewer protections across the board. ASIC's report has documented the harm. What happens next depends on whether regulators and the industry itself decide that documentation is enough.