Dec 18 2018
Industry research company IBISWorld expects that the rising cost of living and sluggish wage growth will drive many consumers to purchase Christmas gifts using buy now pay later services this festive season.
According to IBISWorld, services such as Afterpay, zipPay and Openpay have surged in popularity over the past year. These services are likely to support Christmas spending, as they will allow consumers to stretch their tighter-than-usual Christmas spending budget.
“Traditional credit cards still present an alternative way of purchasing Christmas gifts, but services such as Afterpay charge zero-interest on purchases and allow consumers to stretch out payments over the course of up to eight weeks without necessarily taking on debt,” said IBISWorld Senior Industry Analyst Tommy Wu.
According to Afterpay, sales processed through its services surged 289% over the year through 2017-18, to total $2.2 billion, and it was used for approximately 25% of total online fashion retailing sales by volume.
While Afterpay’s model relies primarily on merchant fees – a mix of percentage and fixed-fee costs charged to merchants on customer orders – it has recently come under scrutiny for the late fees charged to customers who miss their instalment payments. Merchant fees account for just over three-quarters of its revenue, while the remainder is comprised of late fees.
“ASIC’s recent review into the buy now pay later sector found that over half of consumers using these services spent more than they otherwise would have without the service. The review also showed that about one in six users of these services delayed a bill payment, borrowed additional money or became overdrawn to make a scheduled repayment,’ said Mr Wu.
The report also found that approximately 60% of consumers using these services were aged between 18 and 34 years old and about two in five users earned less than $40,000 a year.
“ASIC does not oversee buy now pay later companies under the National Credit Act, and these services are also not regulated as credit providers because they do not charge interest. However, the review has identified the need for oversight for buy now pay later services that may be negatively affecting consumers,” said Mr Wu.
Buy now pay later services are expected to continue rising in popularity as more retailers and consumers adopt them. Already, over 20,000 online retailers use some form of buy now pay later service.
“These services have become deeply integrated into the Australian retail sector over the past year, to the extent that many consumers now think of them as just another form of payment. Buy now pay later services have increased millennials’ retail spending by circumventing their aversion to credit,” said Mr Wu.
According to IBISWorld, consumers tend to use buy now pay later services for smaller purchases so they are not expected to replace the credit cards that people still use to buy big-ticket items. However, now that Afterpay has become so deeply ingrained in everyday life that it is used as a verb, the growth of buy now pay later services shows no sign of slowing.
IBISWorld reports used in this release:
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