The whole Buy Now, Pay Later (BNPL) industry has just exploded. But guess what. Even if you don’t use it, you are paying for it.
Let’s go to the video tape. TAFKAS will use AfterPay for illustration – only because it is the most dominant player in the market. At the moment at least.
The business model of these BNPL is pretty simple and although the proportions vary by provider, they make their revenue from 2 lines:
- Merchant Fees – they charge the merchant, the seller of the good or service, a fee for funding the transaction. This fee can be either fixed or variable (a percentage of the transaction) or both.
- Consumer Fees – they charge the consumer, the buyer of the good or service, a fee which can include establishment, administration or missed/late payments; or a combination.
These BNPL firms have brilliantly identified a regulatory arbitrage in the market by developing a business model that might otherwise be regulated under Australian credit laws, but currently is not.
According to ASIC:
An arrangement would not be regulated under the National Credit Act if the credit is for a term of 62 days or less, fees and charges do not exceed 5% of the amount of credit, and interest charges do not exceed an amount equal to 24% per annum. None of the buy now pay later providers in our review offer these arrangements.
It’s pretty neat to have a 62 day limit to determine whether you have to be regulated. Works very nice if you get repayments over 4 fortnights or 56 days.
But here is the rub. Unlike with credit cards and personal loans, BNPL’s don’t have to spend the huge regulatory and compliance costs because they have not found a regulatory arbitrage.
Not picking specifically on AfterPay, according to their recent half year results, they charge an average merchant fee of 3.9% (see page 14 of this). There is no way in the world that credit card fees are that high. Plus, for many merchants, they add a credit card fee on top of their sale price.
So what this means is that for merchants to maintain the same margin pre- and post- After Pay, they need to increase their prices across the board to cover the cost of feeding the BNPL machine. That means we all pay, even if we don’t use BNPL.
Nice business if you can get it. That’s why it is so smart.
So next time you have a choice to pay now or buy now pay later, be sure to ask for your pay now discount; like consumers used to do when we were allowed to have cash.