Why Afterpay is capping its late fees to 25%
And why it doesn't think the majority of its customer base will be affected.
In a business update released on the ASX this morning, "buy now, pay later" platform Afterpay announced it will introduce a cap on its late fees along with external ID verification checks. Late fees will be capped at 25% of a customer's purchase order, with $68 being the maximum that can be charged.
According to Afterpay, the late fee cap is being introduced after it conducted an in-depth external review as well as consultations with a range of external stakeholders.
"Afterpay has grown rapidly and while losses associated with fraud are low...instances of fraud and default occur in our system and the risk is to Afterpay's account," the ASX statement said. "We are committed to continual improvement of our offering in all respects. We do this because it is the right thing to do for our customers, merchants and stakeholders and it allows us to grow."
Customers are currently charged a $10 late fee if their automatic direct debit fails followed by a $7 fee one week later if the payment fails again. All Afterpay accounts have the same repayment terms, with customers required to repay their purchase over four equal instalments, which are due every two weeks. The inflexibility of these repayments along with the platform's late fees has drawn criticism, along with the fact that Afterpay does not conduct credit checks to help assess someone's ability to manage the repayments.
While the effect of the fee cap remains to be seen (it will be introduced by the end of 2018), Afterpay maintains that its late fees do not affect the majority of its customers.
"Over 90% of orders do not attract a late fee and as Afterpay does not charge monthly account-keeping fees, establishment fees or interest, the 25% cap is on total customer fees charged to the minority of relevant Afterpay customers."
In the statement, Afterpay also maintained that customers cannot "revolve" their credit and the short repayment terms allowed them to quickly detect bad debt and suspend usage.
There are currently 1.8 million customers on the Afterpay platform, with returning customers accounting for approximately 90% of monthly transactions. According to a customer survey, 39% of its customers would look elsewhere if Afterpay was not available and 23% would simply not make the purchase. The majority of Afterpay's customers (77%) use the platform as a budgeting tool.
Afterpay's ASX statement also pointed out that it is not a regulated credit product under the National Credit Code. However, this may change with the Australian Securities and Investments Commission (ASIC) announcing that it was reviewing the sector, which Afterpay said it welcomes.