Background
‘Buy Now, Pay Later’ (BNPL) services are marketed as interest-free services which allow consumers to immediately purchase and acquire goods and services, whilst repaying principal and administrative charges through a payment plan. Some BNPL companies have recently agreed to follow an industry code of practice, introduced on 1 March 2021.[1] However, BNPL companies are currently not subject to statutory regulation, such as the National Credit Code,[2] despite the fact that such companies arguably often impose forms of consumer charges, such as default payment fees.
Default fees charged by BNPL companies
BNPL companies, like Afterpay[3], Zip Pay[4] and Openpay,[5] may not expressly charge interest, but they often charge consumers other fees, primarily in the form of default payment fees or late fees. For example, Afterpay charges late fees to consumers who fail to make repayments towards their debt by specific due dates.[6] Late fees are charged to customers when Afterpay is unable to withdraw a scheduled repayment from a customer’s account.[7]
Afterpay will charge a late fee of $10.00 and for transactions over $40.00, Afterpay will also subsequently charge $7.00 if the debt remains unpaid seven days after the initial due date of the scheduled repayment.[8] Afterpay states in its terms of service that for transactions over $40.00, the totality of the late fees that may be applied to a transaction are limited to the lesser of the following: 25% of the original transaction or $68.00.[9] Afterpay receives a considerable proportion of its revenue from late fees incurred by customers, yet the charging of these fees remains statutorily unregulated, because those rates are purportedly under the current statutory threshold.
Are BNPL services interest-free?
Section 204 of the Code provides the following definition for credit fees and charges for the purposes of the Code.
credit fees and charges means fees and charges payable in connection with a credit contract or mortgage, but does not include:
(a) interest charges (including default charges); or
(b) any fees or charges that are payable to or by a credit provider in connection with a credit contract in connection with which both credit and debit facilities are available if the fees or charges would be payable even if credit facilities were not available (not being annual fees or charges in connection with credit card contracts); or
(c) government charges, or duties, on receipts or withdrawals; or
(d) enforcement expenses.
Currently, many BNPL companies charge consumers default fees while not being subject to regulation under the Code. This exemption from the Code is purportedly due to the argument that those BNPL companies provide interest-free credit to consumers on a short-term basis only.[10]
Controversially, the premise that late fees are not a form of interest charge is not supported by the Code. Section 204 of the Code specifically refers to default charges as a form of credit fees and charges and excludes interest charges from the definition of credit fees and charges.
Therefore, BNPL companies that charge default payment fees might not be charging interest charges to consumers, but they may be charging consumers credit fees and charges for the purposes of the Code pursuant to section 204 of the Code.
Should BNPL companies be statutorily regulated?
Once it is accepted that BNPLs charge consumers credit fees and charges for the purposes of the Code, the question remains whether BNPLs should be subject to the Code.
To that end, section 6 of the Code outlines an exception for the provision of credit to which the Code does not apply. In that respect, section 6(1) of the Code states as follows:
6 Provision of credit to which this Code does not apply
Short term credit
(1) This Code does not apply to the provision of credit if, under the contract:
(a) the provision of credit is limited to a total period that does not exceed 62 days; and
(b) the maximum amount of credit fees and charges that may be imposed or provided for does not exceed 5% of the amount of credit; and
(c) the maximum amount of interest charges that may be imposed or provided for does not exceed an amount (calculated as if the Code applied to the contract) equal to the amount payable if the annual percentage rate were 24% per annum.
Accordingly, section 6(1) of the Code states that the provision of credit will not be subject to the Code if credit providers satisfy three conditions.
It may be the case that generally, the business models and products of BNPLs satisfy the conditions for the short term credit exception such that the Code does not apply. However, it is equally plausible that in specific transactions, BNPL services inadvertently fail to satisfy the three conditions of the exception such that the Code should apply to those transactions.
Section 6(1)(a) of the Code provides that credit providers will not be subject to the Code if ‘the provision of credit is limited to a total period that does not exceed 62 days’.[11] Afterpay consumers must make repayments towards their debt, in four instalments due every two weeks.[12] Openpay explicitly states in its marketing materials that consumers may choose a payment plan that can range between one and twenty-four months.[13] Many BNPL companies do not expressly state in their respective terms of service that credit will only be provided to consumers for a period less than 62 days. Thus, there may exist some consumers to whom BNPL companies provided credit for over 62 days.
Assuming that late fees charged by BNPL companies are credit fees and charges for the purposes of the Code, the statutory limit regarding such fees in section 6(1)(b) of the Code may easily be exceeded in specific transactions. Section 6(1)(b) of the Code provides that credit providers will not be subject to the Code if ‘the maximum amount of credit fees and charges that may be imposed or provided for does not exceed 5% of the amount of credit’.[14]
The default fees, being arguably credit fees and charges, which BNPL services charge, could at times easily exceed the limit of 5%. For example, as discussed earlier, Afterpay charges consumers who default on making a single repayment a standard fee of $10.00. Consequently, if a customer purchases any good under the price of $200.00, and is subsequently charged $10.00 for defaulting on a single repayment, the customer has been subjected to a credit fee that already equals the limit of 5% contained in section 6(1)(b) of the Code. One more default fee, and the BNPL has arguably not satisfied the short term credit exception to the Code.
In the alternative event that late fees charged by BNPL companies are deemed to be interest charges in accordance with the Code (instead of credit fees and charges), such BNPL companies may fail to satisfy section 6(1)(c) of the Code. In transactions involving cheaper goods or services, BNPL companies may fail to satisfy section 6(1)(c) of the Code which requires that interest charges applied must ‘not exceed an amount equal to the amount payable if the annual percentage rate were 24% per annum’.[15]
Therefore, it is arguable that the default fees charged by BNPL services would, in some circumstances, fail some of the requirements contained in the section 6(1) short term credit exception such that those transactions or part thereof ought to be subject to the Code (or at least not be protected by the short term credit exception).
BNPL companies and consumer protection
BNPL companies may continue to market their respective services as interest-free to distinguish themselves from other more traditional credit providers but whether all transactions engaged in under this model are excepted from the Code is arguable. With BNPL services gaining more traction in recent years, consumers should be afforded responsible marketing by such services providers, and where appropriate, protection under the Code.
[1] David Adams, ‘Australia’s buy now, pay later players have officially released their own rulebook, promising caps on late fees and self-imposed sanctions for rule-breakers’, Business Insider Australia (Website, 1 March 2021) < https://www.businessinsider.com.au/buy-now-pay-later-code-revealed-2021-3>.
[2] National Consumer Credit Protection Act 2009 (Cth) vol 2, sch 1.
[3] ‘Terms of Service – Australia’, Afterpay (Website, 1 March 2021) <https://www.afterpay.com/en-AU/terms-of-service>.
[4] ‘What happens if I miss a payment or don’t pay back on time?’, Zip (Website) <https://zip.co/hc/en-us/articles/360001586815-What-happens-if-I-miss-a-payment-or-don-t-pay-back-on-time->.
[5] ‘AU Terms & Conditions’, Openpay (Website, 17 March 2021) <https://www.openpay.com.au/legal/au-terms-conditions-17mar21/>.
[6] ‘Terms of Service – Australia’ (n 3).
[7] Ibid.
[8] Ibid.
[9] Ibid.
[10] Ranina Sanglap, ‘Australian buy-now-pay-later industry may need regulation to inspire confidence’, S&P Global: Market Intelligence (Website, 9 March 2021) [3] <https://www.spglobal.com/marketintelligence/en/news-insights/latest-news-headlines/australian-buy-now-pay-later-industry-may-need-regulation-to-inspire-confidence-62973889#:~:text=Buy%2Dnow%2Dpay%2Dlater%2C%20or%20BNPL%2C%20players,credit%20for%20a%20short%20term>.
[11] National Consumer Credit Protection Act 2009 (Cth) vol 2, sch 1, s 6(1)(a).
[12] ‘Terms of Service – Australia’ (n 3).
[13] ‘It’s easy to pay smarter.’, Openpay (Website) <https://www.openpay.com.au/how/>.
[14] National Consumer Credit Protection Act 2009 (Cth) vol 2, sch 1, s 6(1)(b).
[15] Ibid s 6(1)(c).