Anthony Eisen and Nick Molnar, from technology company Afterpay. Photo / File
Anthony Eisen and Nick Molnar, from technology company Afterpay. Photo / File
COMMENT:
Fintech start-up Afterpay has a neat product offering with the potential to turn the finance sector on its head, or at least severely disrupt it.
It lets people make immediate purchases online or instore and pay no money at the point of sale. Instead, they pay for the purchasein four instalments with no added fees or interest, except for late fees. For cash-poor millennials who are wary of credit card debt but want instant gratification, the service is a boon.
Retailers get more sales because their customers don't need to have cash to make a purchase. In exchange, they pay a commission of between 4 to 6 per cent of the purchase price.
The company has also rolled its offer out to a range of businesses in New Zealand, including Glassons, Icebreaker, Smith + Caughey's and Suprette, and to a large number of online businesses. It recently set up in the US.
So far, Afterpay appears to be a big success. Founded in 2014, the company has a stock market value of about A$5.5 billion (NZ$5.8b) and its two founders – 29-year old lawyer Nick Molnar and 47-year old former investment banker Anthony Eisen – have made about half a billion each.
But there's a big problem on the horizon for Afterpay: the regulators have its operations in their sights.
To this point, the company has been able to skirt around many of the consumer-protection regulations that usually come with providing loans to consumers.
But there's a big problem on the horizon for Afterpay: the regulators have its operations in their sights.
Curtin University accounting academics Saurav Dutta and Lien Duong say Afterpay is not classified as a credit provider because, technically, it doesn't charge interest. As a result, Afterpay is not legally required to observe the Act's responsible lending obligations, which include performing a credit check and verifying a customer's income and ability to pay a debt back, the pair say.
At the same time, financial counsellors and regulators are concerned about the buy-now, pay-later sector's potential to lead shoppers into financial difficulty.
The Australian Securities and Investments Commission said in a report last year about two million Australians had used schemes like Afterpay and there was "a real risk that some buy now pay later arrangements can increase the amount of debt held by consumers and contribute to financial over-commitment".
Consumers now have an alternative option to get the things they want. Photo / Getty Images
So far, Afterpay has avoided tougher regulation.
But if too many consumers spend themselves into trouble with Afterpay and similar services, they will face much tougher regulations and all their ensuing costs.
After revelations from last year's banking royal commission, Australia's politicians, regulators and public will have little tolerance for any other finance sector players who are perceived to be taking advantage of customers.
And there is a more immediate regulatory problem on the horizon. On Wednesday last week, Australia's anti-money laundering investigator Austrac said it will conduct an external audit into Afterpay's compliance with money laundering and terrorism financing laws.
Austrac said it would work with Afterpay to mature and strengthen its compliance processes and staff training. But it also threw down the gauntlet: "We will not hesitate to take action where an organisation is failing to appropriately protect itself and Australia's financial system from criminal activity," Austrac boss Nicole Rose said.
It's a big worry for a company that isn't yet profitable. In the first half of its current financial year, Afterpay made a A$22.2 million loss. It is true the company is growing rapidly and that the financial results have the potential to turn around as it acquires more merchants and customers and reaps the benefits of scale.
We will not hesitate to take action where an organisation is failing to appropriately protect itself and Australia's financial system from criminal activity.
A requirement to boost its compliance – with more thorough customer checks for instance –could add considerably to its costs at a time when it is yet to turn a profit. It's not the first time Afterpay has faced questions about how closely it screens its customers and how much it knows about them.
Proxy advisory firm Ownership Matters said in a 2018 report that the child of one of its staffers, with $80 in their bank account, established an Afterpay account and ordered seven bottles of French champagne worth $334. Afterpay promised to upgrade its systems after the revelation received wide media coverage.
Interestingly, news of the Austrac audit – and the subsequent 16 per cent share price fall – came just a day after the two founders sold A$94 million worth of their shares and sold A$300 million in new shares to investors to fund its US expansion. (In fairness, Afterpay had previously warned that regulatory concerns were its number one risk).
Like many entrepreneurs seeking cash from investors, Molnar and Eisen know how to spin a good story. They like to relate how the business got underway when Eisen, who lived across the road form Molnar, saw his light on late at night and wondered what he was working on. The answer was that he was looking for a way to fund consumers' online purchases from the family jewellery business. The two got talking and Afterpay was born. It's a slick anecdote, but Afterpay will require more than nicely-polished stories if it is to avoid a regulatory crackdown.
