New plan makes payments easier, but being late will be costly.
With airline Jetstar and retail giant Kmart recently having rolled out Afterpay for online shopping, concerns are growing that the ‘collect now, pay later’ digital platform may trap unwary customers with growing debt.
Australian innovation Afterpay splits repayments on purchases into four equal instalments paid at fortnightly intervals and does not charge interest.
For instance, if you buy a $100 item, you are required to allow Afterpay to directly deduct four $25 instalments from your debit card over an eight-week period.
It allows customers to shop without a credit card, but if they are late with payments for whatever reason, they will incur a fee of at least $10, plus subsequent fees of $7 if the balance remains unpaid.
On its website, the company explains: "We cap late fees at 25 per cent of your purchase price or $68 (whichever is less) – they never go higher than this. The real penalty for missing a payment is that you can’t use Afterpay until you make your outstanding payment.
"Financial penalties are there, but only to stop Afterpay being deliberately taken advantage of – and as an incentive for everyone else to stick to their payment plan."
An Australian Securities and Investments Commission (ASIC) report found that in the past financial year, Afterpay earned a quarter of its income, or $28 million, from late fees.
Curtin University accounting academic Saurav Dutta explains the way Afterpay makes money another way - through compounding interest that can soar into double digits and beyond.
The largely unregulated digital platform, and others like it, has now attracted the scrutiny of watchdogs.
These platforms do not do credit checks on potential customers because they are not offering credit. This can lead to customers taking on more debt than they can afford.
South Australian Council of Social Services chief executive Ross Womersley warned in The Guardian that Afterpay was “another way of encouraging us to commit to money we don’t actually have in our pockets”.
“That’s fine if we’re in a situation where we have the income flow to meet whatever payments we’re obliged to ... but it’s easy to picture a situation where someone loses track of their commitments and over-burdens themselves,” he said.
Afterpay, one of the best-performing stocks on the Australian Securities Exchange this year, already has more than one million users.
Would you use a ‘collect now, pay later’ platform if it did not charge interest? Do you think customers who incur late fees for non-payment of bills have only themselves to blame?
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