BNPL services are popular. Beyond fueling instant gratification through consumption, there are many out there that may not really understand the potential cost of using services like Afterpay. If you're able to reliably make your payments then there is little downside to using Afterpay versus a credit card. However, missing a payment, or falling into a pattern where you are missing payments, Afterpay gets considerably more expensive than credit cards.
Late Fees
The way Afterpay markets late fees seems reasonable on the surface. $10 fee when a payment is late to a maximum of 25% the purchase price or $69, whichever is less. People will compare that to an interest rate on a credit card of anywhere from 24% to 30% and it looks "reasonable". However, there are a few significant differences. Lets use a basic example spending $600 with Afterpay vs $600 with a credit card.
With an Afterpay purchase you pay 4 payments of 25%, the first at purchase and the remainder every 2 weeks. So on day one Afterpay will attempt to deduct $150, leaving you owing $450. After 2 weeks, another $150, and two more $150 at 4 weeks, and 6 weeks. Simple. Now, what happens when we miss a payment? For this example let's assume we miss the last payment at 6 weeks. Aside from possible dishonour fees from our nominated payment account, we are charged $10 from Afterpay. Afterpay will charge us $10 up to a maximum of $69 or 25% of the purchase price, whichever is less. In this case a maximum penalty of $69 as the purchase price was $600. Note that the 25% cap is on the purchase price, not the outstanding balance. We have paid back $450 so we only owe $150 at that point. Say we notice the mistake early, have the remaining $150 available and pay the balance off. The total cost was $160 with the late fee. If we took longer to get the balance, $10 would be charged each week until the cap of $69 was reached.
Now if we look at the same scenario with a credit card, the entire purchase price would be taken on credit with an interest free period of typically up to 44 days. Each month there is a cut-off date for the due payment, so the "up to" 44 days applies from the date of purchase to the next payment cut-off date. From there a statement for the current balance is calculated and you have around 14-20 days to pay before you are charged interest. Of course you can make payments against a credit card at any time. So, if we assume you missed your credit card payment and had a 25% p.a. interest rate on the card, how much would it cost you paying it one day late? Worst case, at 45 days from purchase:
25% / 365 * 45 * $600 = $18.49.
Now that looks worse, but it's not a fair comparison. In the Afterpay case we paid off $450 of the balance and missed the last payment, so let's assume we could pay off $450 of the balance by the CC due date:
25% / 365 * 45 * $150 = $4.62
Afterpay charged us $10, on a credit card in similar circumstances it would have been less than half as expensive of a penalty.
Penalties are applied per purchase
The above example was for a single $600 purchase. Afterpay's target audience is for people making multiple impulse purchases. If we change the scenario into 6 purchases of $100 each, failure to make payments for the one or more of the 6 final payments would end up costing $10 for *each* purchase that was not paid for. Chances are with the smaller payments of $25 at least one or two might have been paid off, but each purchase of $100 would potentially attract a cap of $25 in late fees and it would just take 3 weeks to reach that cap at $10/week. If it was all 6 purchases that is $150 in late fees. The $69 cap applies to individual purchases, not the balance of purchases.
Again, for a credit card the penalty for not paying off the balance at the end of the month is based on the outstanding balance at the end of the month, not the purchase price. It is worth noting that credit cards used to be far less fair where not paying the balance off at the end of the month they applied the full interest of the starting balance, not the balance remaining,
Capped percentage late fees vs. p.a. interest rates
Afterpay is structured in a way that penalty fees are capped out quite quickly, in most cases within 3-4 weeks after a payment is missed. While the cap is around 25% of the purchase price, this is in no way comparable to a 25% p.a. (per annum) interest rate. When you have a 25% penalty being reached in 4 weeks, that is equivalent to a 325% p.a. interest rate. When the rate is charged at $10/week even on smaller, individual purchases, that comparison interest rate is even higher.
The threat of pay it or lose it
One of the strongest incentives that BNPL providers like Afterpay use on consumers is the threat of cutting off your access to their credit if you miss payments. While this might seem like a good thing to keep you from overspending, this leads to consumers prioritizing the Afterpay payments over other debts or bills to keep that purchasing power lifeline open. Afterpay can downplay the amount of "debt" and arrears (people behind on payment) with their shareholders because the platform is leveraged to get borrowers to extend their outstanding balances on credit cards, bills, tuition, etc. before missing Afterpay payments.
No benefits offered compared to credit card purchases
Many credit cards offer rewards points or cash-back offers when making purchases with them. You are also free to negotiate with vendors for a good deal on goods. The entire point of BNPL is to lessen the sticker shock of a purchase. Many vendors will not haggle on price when accepting a purchase on BNPL given the fees they pay to the platform are considerably higher than credit card gateway fees.
Takeaway
Ultimately the tool isn't evil, but it can be used and abused, plus as a business it is expected to grow and make money. Many emerging "disruptors" aim to gain popularity rapidly by burning through investment money without a lot of thought or transparency into how such businesses can transition into profitability. The worst thing that a consumer considering using BNPL is to ever get into a situation where they become dependent on it. This belongs right alongside services like MyPayNow & WageTap which will release daily amounts based on your pay cheque so you don't have to wait until pay day. Of course the sum of your daily pay outs won't come close to your normal fortnightly pay, and you can bet there are penalties and fees if it turns out you had unpaid leave while on their platform. The real scary thing is that even Australian Banks are getting in on this such as Commonwealth Bank AdvancePay... I mean seriously, regulators? Hello??
Forms of "pay day lending" have been offered in the past and continually get reinvented and re-imaged as a means of "helping" less fortunate people that don't have access to traditional credit or sufficient cashflow to cover legitimate one-off costs. Unfortunately, these businesses almost always devolve into something that exploits the most vulnerable.
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