Nick Molnar and Anthony Eisen were in their late 20s when they launched Afterpay in 2014. Their startup was an app, inspired by the concept of a “layaway” — a method of financing something you can’t immediately afford.
Layaways were often maligned because it typically led to borrowers facing enormous interest rates, and Molnar and Eisen knew that millennials and Gen Z had an “aversion to credit cards” due to the threat of debt. That’s why Afterpay offered the option to pay off a purchase in four interest-free statements.
The founders’ assumption proved to be correct, and Afterpay skyrocketed in popularity. Meanwhile, a Bankrate survey from 2016 found that only one in three adults between 18 and 29 owned a credit card.
Two years after launching, Molnar encouraged fans of Afterpay to reach out to their favorite retailers and ask for them to start using the platform. Soon, tons of businesses across Australia were implementing Afterpay as a purchasing option. In 2018, Molnar decided to expand to the U.S.
“No one wants to take out a loan to buy a dress,” Molnar told Forbes in a 2018 interview. “There has been a shift in how people spend money, and that’s what we’re focused on solving.”
Afterpay’s marketing is clearly targeted toward younger millennials and Gen Z — its “About Us” page features photos of young people taking selfies and laughing at their phones. Large-font phrases across the page say things like, “Shopping is fun“ and “We trust and empower shoppers,” seemingly putting the power in the hands of shoppers. It’s consumer-centric, which has been proven to be an effective strategy with millennials and Gen Z.
Afterpay’s website also advertises all of the retailers the brand works with — organized by categories like sports, beauty, home goods and shoes. It could not be easier to find whether your favorite retailer has partnered with Afterpay, and the site also reveals whether certain stores are having sales, making it all the more enticing for shoppers to click.
It almost seems too good to be true. But what happens if someone misses one of the four installment payments?
In The Know spoke to Ethan Taub, the founder and CEO of Goalry, a company that offers advice for reaching financial goals. Taub believes that companies like Afterpay are taking advantage of the stereotype that millennial and Gen Z shoppers are all about instant gratification.
“I think that a lot of these payday lenders believe that all gen z and millenials prefer to have the item they need now, and pay it back later,” Taub told In The Know. “If you do not pay on time [it] can be a nasty spiral to get out of. If you pay on time, your credit score will not be affected, but if you do not, there can be big consequences.”
How common is not paying on time? According to Afterpay’s financial reports, only a small portion of its annual earnings come from late payment charges. From 2016 to 2017, Afterpay generated about $23 million Australian dollars ($16 million in USD) in fees from retailers and another $6.1 million ($4.4 million in USD) in late fees.
Afterpay does not run credit checks on customers who sign up to use it, which might seem great to users who have low credit, but it’s also reflective of how little the company cares about whether its users can actually pay off the installments.
The fine print when signing up with Afterpay says that while the company won’t run a credit check on you, it can order your credit report and make a note that you missed payments.
Thus, while Afterpay doesn’t benefit your credit score, it can destroy it.
Right now, the Australian Securities and Investments Commission (ASIC) is reviewing the “buy now, pay later” practices after a 2018 report found that the tactic “can cause some consumers to become financially over-committed.”
Commonwealth Bank chief executive Matt Comyn raised a similar concern in a parliamentary committee on September 7, saying companies like Afterpay need to “consider the entirety of [the customer’s] capacity to pay, as opposed to just accepting their buy now, pay later application on its face value” because it can create tons of issues with people’s credit scores.
But Afterpay insists that its customers do not need legal protection and that the company can self-regulate any problems. A Reddit user commented on the company’s statement by saying: “History has shown us again and again and again, that in a profit-driven world, self-regulation does not work.”
“We regulate credit cards. We regulate loans. We regulate pay day lenders. How is this any different?” another Reddit user posted. “These businesses have just as much risk of being problematic. What’s this magic thing they supposedly have that prevents them from having the same problems other unregulated lendings have?”
ASIC’s previous findings discovered that one in six “buy now, pay later” users had either overdrawn their bank accounts, delayed other bill payments or borrowed money to pay off installments and avoid a late charge.
The future of Afterpay is uncertain, too. With competitors like the Sweden-based Klarna popping up, fintech companies have to figure out ways to stay ahead of the competition.
As these companies rise in popularity, it’s worth knowing there are safer ways to use Afterpay. Customers should set up their account with a debit card (not a credit card) and set up payment reminders to avoid any accidental late fees.
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