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‘Similar to ordering a pizza’: how buy now, pay later apps influence young people’s spending

Young people are often blamed for making <a href="https://www.theaustralian.com.au/life/weekend-australian-magazine/moralisers-we-need-you/news-story/6bdb24f77572be68330bd306c14ee8a3">irresponsible choices</a> with money. But the real issue is not whether they eat too many <a href="https://www.theguardian.com/news/datablog/2016/oct/18/are-millennials-actually-bad-at-saving-or-are-houses-just-unaffordable?CMP=share_btn_fb">expensive cafe breakfasts</a>. Young Australians today face an uncertain job market, rising university fees and astronomical house prices. Unfortunately, <a href="https://theconversation.com/home-ownership-falling-debts-rising-its-looking-grim-for-the-under-40s-81619">debt</a> is also an inevitable part of their lives. This comes amid a huge rise in the number of “buy now, pay later” apps, such as <a href="https://theconversation.com/explainer-how-lending-startups-like-afterpay-make-their-money-86477">AfterPay</a>, and <a href="https://www.news.com.au/finance/money/costs/ripoff-financial-experts-warn-of-the-dangerous-trap-of-payday-loans/news-story/1471cc4a61594cdb9e7a724a76e534d7">payday loan apps</a>, such as <a href="https://www.abc.net.au/news/2020-08-18/payday-lending-consumer-risk-coronavirus-financial-hardship/12549412">Nimble</a>. It is possible to make purchases online with the the tap of a button, even if you don’t have the money in your account or on your credit card. It is also possible the able to borrow money <a href="https://www.abc.net.au/triplej/programs/hack/whats-up-with-payday-loans/7794806">within minutes</a>. To better understand how young people negotiate debt, we interviewed 31 people aged between 18 and 29 in the Newcastle and Hunter Valley area in 2020 and 2021. We asked them how they access credit and their views on different kinds of debt. <h2>Our study</h2> Our participants saw debt as a necessity if they are going to have an acceptable life in the present and plan for the future. As Steph, a 22-year-old university student, said: <blockquote> Large debts like the mortgage, the HECS debt […] things like that I suppose in a sense it’s useful debt. It makes sense and it gets you further by doing it because there’s still an equity in what you’re doing … It follows you not nearly as badly as some other debts. </blockquote> Young people also made distinctions about the way debt feels and how approachable it is. They acknowledged short-term consumer debts may not be “good”, but felt they were also part of being able to buy the things and have the experiences associated with being young. Those we interviewed talked about AfterPay (where you pay off the debt in four installments) as an everyday part of life. As Alexa, a 23-year-old university student, told us: <blockquote> AfterPay is for just those little wants that I don’t want to pay for up front. </blockquote> They also described it as a low-risk and almost friendly way to buy things. This was particularly when compared to a bank. Alice, a 21-year-old sales assistant, put it this way: <blockquote> AfterPay is like, ‘Oh, just pay this off in four quick things and you can have your item. We’ll send it out.’ But then banks are like, ‘If you don’t pay this back, you’re going to get so much interest and it’s going to suck, and you’ll have the sheriffs roll up at your house and you’re going to be sad.’ </blockquote> <h2>Like ordering a pizza</h2> Interviewees attributed some of this friendliness to the process of accessing the money or goods. Mia, a 21-year-old paralegal, described applying for a small loan on the Nimble app: <blockquote> When you apply for the money […] you can track at any point on it. The Nimble app is so similar to ordering a Domino’s pizza […] Whereas a credit card through a banking app, it’s nothing like that […] They send me letters and even opening the mail terrifies me, nothing good comes via snail mail ever. </blockquote> The online, easy nature of these loan services closely relates to how young people engage with information more generally in their lives. In this sense, there is a familiarity and comfort to the way they work. As Mia continues: <blockquote> [It’s] positive, it’s not daunting, it’s informative, it’s instantaneous. The second the money comes out, I get a thank you email and a notification on the app. It’s like, ‘you have this many payments left, this is how much you’ve paid, this is how much you have left to pay, you will still be paid in full by this date’. I don’t have any of that with my credit card. </blockquote> <h2>Familiar tactics</h2> Inteviewees also spoke of how services like AfterPay and short-term loan apps used similar tactics to social media platforms to encourage increased engagement and make the experience feel informal and even social. <img src="https://images.theconversation.com/files/429684/original/file-20211102-10001-letons.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" alt="Young people using their phones and laptops." /> Applying for a loan via an app does not involve ‘scary’ paperwork, according to interviewees. www.shutterstock.com These include “on this day” reminders (such as, “this time last year, you bought this pair of shoes”) and waiting time indicators. There are also <a href="https://theconversation.com/gamification-status-you-score-ten-points-for-reading-this-article-5068">game elements</a>, including “rewards” for early repayments. Interviewees were aware this was manipulative. Lilian (26) works at a chain clothing store and was “rewarded ” for paying off a purchase early. <blockquote> I got this thing the other day saying that my first payment [on a new purchase] is actually going to come out [later] now. Of course, I’ve been rewarded for paying everything off early [before] […] Yeah it’s like it’s delaying it, it’s not an issue now, but it’s going to be an issue in two weeks’ time. </blockquote> <h2>What next?</h2> Our interviewees may see debt as a necessity, but they are also aware they have (some) choices within this. So they prefer to go with providers or platforms that feel less threatening, especially as using “buy now, pay later” services sometimes does not feel like being in debt. <img src="https://images.theconversation.com/files/429686/original/file-20211102-25-9gi5ho.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" alt="Young man on his phone with a coffee." /> Young people see debt as an inevitable part of life, according to new research. www.shutterstock.com There is a need for <a href="https://www.smh.com.au/national/calls-for-tighter-regulation-as-buy-now-pay-later-costs-mount-20210610-p57zuc.html">greater regulation</a> of the ways these products are promoted. It should always be made clear that this is a form of debt, not just a way to pay. Beyond, this, instead of “<a href="https://www.theguardian.com/news/datablog/2016/oct/18/are-millennials-actually-bad-at-saving-or-are-houses-just-unaffordable?CMP=share_btn_fb">blaming</a>” young people for their spending habits, we need a better understanding of the economy and society they are living and working in. And how debt it is all but inevitable for people on low wages, with poor job security and insecure housing. <a href="https://theconversation.com/profiles/steven-threadgold-167968">Steven Threadgold</a>, Associate Professor, Sociology, <a href="https://theconversation.com/institutions/university-of-newcastle-1060">University of Newcastle</a>; <a href="https://theconversation.com/profiles/david-farrugia-243862">David Farrugia</a>, Senior Lecturer, School of Humanities and Social Science, <a href="https://theconversation.com/institutions/university-of-newcastle-1060">University of Newcastle</a>; <a href="https://theconversation.com/profiles/julia-coffey-129629">Julia Coffey</a>, Senior Lecturer in Sociology, <a href="https://theconversation.com/institutions/university-of-newcastle-1060">University of Newcastle</a>; <a href="https://theconversation.com/profiles/julia-cook-869068">Julia Cook</a>, Lecturer in Sociology, <a href="https://theconversation.com/institutions/university-of-newcastle-1060">University of Newcastle</a>; <a href="https://theconversation.com/profiles/kate-davies-290466">Kate Davies</a>, Human Services Lecturer, <a href="https://theconversation.com/institutions/university-of-newcastle-1060">University of Newcastle</a>, and <a href="https://theconversation.com/profiles/kate-senior-1284499">Kate Senior</a>, Associate Professor, <a href="https://theconversation.com/institutions/university-of-newcastle-1060">University of Newcastle</a> This article is republished from <a href="https://theconversation.com">The Conversation</a> under a Creative Commons license. Read the <a href="https://theconversation.com/similar-to-ordering-a-pizza-how-buy-now-pay-later-apps-influence-young-peoples-spending-170024">original article</a>. Image: Shutterstock

Money & Banking

Afterpay enters Aussie pubs, experts warn of “debt spiral”

Afterpay – the popular buy now, pay later (BNPL) service – has made the jump from retail stores to over 160 Aussie pubs. But consumer advocates are worried that the move could send some people into a “debt spiral”. Australian Venue Co (AVC) has become the first hospitality group to partner with Afterpay as part of its ‘Dine Now, Pay Later’ offering – which rolls out across its venues from November 15. AVC CEO Paul Waterson said the decision was driven by customer demand, who he said have shifted away from credit cards, as well as a desire to offer convenient experiences for guests, “We’re not afraid to go first. As a group, we seek out other industry leaders who we can work with to innovate on behalf of our customers,” he said. “We are looking forward to our guests being able to choose an alternative, innovative way to pay for dining out at our pubs.” However Katherine Temple, the policy and campaigns director at the Consumer Action Law Centre, said the centre has seen more people struggling with BNPL debts, making the move from AVC all the more concerning. “Often buy now, pay later is part of a larger debt so people are also struggling with existing credit card debts or personal loans or utility loans, so it’s rarely the only type of debt when they come to us,” she told <a rel="noopener" href="https://www.news.com.au/finance/money/costs/afterpay-moves-into-hospitality-with-australian-venue-co/news-story/b569dcf94efcde0e5eef2ba79852c24f" target="_blank">news.com.au</a>. “The debt varies but it can be [from] a couple of thousand dollars up to tens or hundreds of thousands of dollars of debt and we are hearing from people of all ages and walks of life that are using these products now.” James Hunt, a policy advisor at Financial Counselling Australia, told <a rel="noopener" href="https://www.goodfood.com.au/eat-out/news/twobeer-pub-trip-or-sixweek-hangover-afterpay-comes-to-the-pub-20211104-h1zlwk" target="_blank">Good Food</a> that Afterpay and other BNPL companies aren’t required to check if customers can afford the repayments, “so unfortunately many people are ending up with unmanageable debt”. Ms Temple shares those concerns, citing a lack of safeguards “to ensure people can afford to make repayments”, which she says exacerbates “financial hardship and money problems”. “Buy now, pay later is everywhere now and is normalising debt particularly for younger people,” she said. A spokesperson for Afterpay said the company enters new consumer markets based on demand. “As credit cards steeply decline, Australians are looking for smarter ways to manage their budget, using their own money, and avoiding interest and debt traps,” they said. They also said the Afterpay’s product has built-in spending rules to ensure customers don’t pay interest or revolve in debt. “Customers are unable to continue using Afterpay if they are late on a single instalment,” they added. However, customers do pay some fees if they miss a payment, with Afterpay collecting a whopping $70 million in late fees in 2020. The Australian Securities and Investments Commission (ASIC) also criticised Afterpay, Zip, and other BNPL providers for charging excessive fees. In a report released last year, the regulator found that one in five BNPL users are missing payments. It also found that 15 percent of users had taken out additional loans to pay for the services. As for Afterpay’s place in pubs, chief spokesperson for CANSTAR Steve Mickenbacker said it could be especially challenging to navigate. “You visit a pub, perhaps budgeting to buy two drinks … BNPL puts you in a position to turn those two drinks into eight,” he said. “Without self-discipline, that two-beer pub trip could become a six-week hangover.” Images: Getty Images

Money & Banking

"Disturbing" Rebel Wilson ad slammed by experts

An ad starring Australian starlet Rebel Wilson has been deemed “disturbing” by financial counsellors. The Afterpay advertisement stars Wilson telling a young girl that “if credit cards and cash had a baby you could pay it over time without ever paying interest”. Financial Counselling Australia chief executive Fiona Guthrie said the campaign has gone a step too far. “It minimises the risks of using buy-now, pay-later products and the fact she is talking to a young child, explaining a credit product, is very disturbing,” Ms Guthrie said on Tuesday. She went on to say financial counsellors are seeing more and more people who use the buy-now, pay-later scheme calling into increasing debt. “People think they’re harmless, but the reality is they are a form of credit and should be treated that way,” she said. <iframe width="560" height="315" src="https://www.youtube.com/embed/_rCu47xQN34" title="YouTube video player" frameborder="0" allow="accelerometer; autoplay; clipboard-write; encrypted-media; gyroscope; picture-in-picture" allowfullscreen=""></iframe> FCA has written a number of complaints about the Wilson clip to Ad Standards, which manages complaints about advertisements under the industry’s self-regulated system. “We want it discontinued as soon as possible,” Ms Guthrie said. She went on to say the AD is one of several that Afterpay is currently running. “Why these celebrities want to associate themselves with a product that can cause such harm is beyond us,” Ms Guthrie said. “ASIC’s 2020 report found that one in five people are missing payments. It also found that as a result some people are cutting back, or going without essentials, such as food.” “These slick and expensive campaigns only serve to lull consumers into using buy-now, pay-later more. There is a high risk of getting into debt, especially if you are using the product multiple times or have more than one account.” In her complaint to Ad Standards, Ms Guthrie said Afterpay wasn’t available for people under 18. “It would not be acceptable to explain the benefits of personal loans or credit cards to children in an advertisement and it should not be acceptable in this case,” she said. “The use of children is gratuitous and inappropriate.” She said the ad also failed to show how buy-now, pay-later products worked. She also went on to say that anyone who missed an instalment would cop late fees. “We urge Ad Standards to review this advertisement and ensure it is discontinued from all platforms in Australia as soon as possible,” she said. Earlier this week, Afterpay and its competitor Zip Co claimed that banks were forcing mortgage applicants to delete their accounts before approving home loans. In a statement to TND Afterpay defended its advert, saying it was proud to divert Australians away from credit cards. “Afterpay has strict controls in place to ensure that only consumers who are 18 and over can use our product. We verify the identity of all our customers,” the spokesperson said.

Money & Banking

Why the extra cost of ‘buy now, pay later’ is still enticing

Zip Co’s “buy now, pay later” service is fast becoming a ubiquitous payment option in Australia. Retailers from Bunnings and Best & Less to Target and Tigerair offer it. All up, the company now boasts 10,000 retail partners and more than <a href="http://zipmoneylimited.com.au/files/Credit_and_financial_services_targeted_at_Australians_at_risk_of_financial_hardship_Public%20Final.pdf">850,000 customers</a>. It’s part of the phenomenal upsurge of “buy now pay later” services. In the past three years, according to Australia’s corporate watchdog, the number of Australians using such services has jumped from 400,000 to 2 million. Their rising popularity has to do with technology making electronic payments easier and more secure, more online shopping, increasing distrust of banks and younger people shying away <a href="https://www.businessinsider.com.au/afterpay-success-fintech-secrets-millennials-2018-10">from credit card use</a>. But the way a service like Zip operates has consumer advocates worried. Zip says it <a href="https://help.zip.co/en/articles/20-will-you-run-a-credit-check-as-part-of-my-application">may do a credit check</a> before approving an application, but its business model means it can avoid the responsible lending requirements of the <a href="https://www.legislation.gov.au/Details/C2019C00053">National Consumer Credit Protection Act</a>. The potential it will entice those with low income and bad credit has attracted the scrutiny of the <a href="https://www.aph.gov.au/Parliamentary_Business/Committees/Senate/Economics/Creditfinancialservices">Senate inquiry into credit and financial services</a>. So let’s look at how Zip’s business model works, and why it is proving so popular. <h2>How Zip works</h2> Zip has two slightly different products: one offering credit more than $A1,000 is called Zip Money; the other offering credit up to $A1,000 is called Zip Pay. Let’s focus on Zip Pay as the company’s most popular and profitable service. Zip Pay is particularly convenient in that you can access credit at the point of purchase with minimum hassle and little delay. Its automated application process is quick. It says it may perform a credit check but there is no explicit income verification procedure. Zip Pay promotes itself as “interest-free”. It instead charges a flat fee of $6 a month on whatever is owed, and an additional $5 if the minimum monthly payment of $40 is not made on time. It also charges a 4% upfront fee to the retailer; that is, it pays the retailer A$960, then collects $1,000 from the customer. <h2>Implicit costs</h2> Despite the “interest-free” boast, Zip Pay’s $6 monthly fixed fee is in fact a quasi-interest charge, equivalent to paying 7.4% interest annually on a $1,000 debt. Because you still pay $6 even if you owe less than $1,000, the fee structure is also highly regressive. The less you owe, the greater the effective interest rate you pay. For example, if you owe $500, the $6 fee translates to a 15% annualised interest rate. If you owe $100, it equals an annual interest rate of more than 100%. <hr /> <iframe id="TsbIB" class="tc-infographic-datawrapper" src="https://datawrapper.dwcdn.net/TsbIB/1/" height="400px" width="100%" style="border: none;" frameborder="0"></iframe> <hr /> This fact could encourage you to take advantage of the full $1,000 of credit, on the basis it doesn’t cost you any more in monthly charges. That might, of course, be Zip’s plan, because the more you owe the longer it may take you to pay the debt off. But if you feel confident you will have more money in the future than you have now, this easy credit option could be a highly attractive means to “manage” the disconnect between the things you want and when you can afford these. <h2>Theories and consequences</h2> If that’s the case, you fit the common profile, with <a href="https://download.asic.gov.au/media/4957540/rep600-published-07-dec-2018.pdf">90% of “buy now pay later” credit consumers</a> feeling the debt “helps” them better manage their finances. What makes individuals regard debt as manageable is of great interest to entrepreneurs and economists alike. It was Milton Friedman, winner of the 1976 Nobel Prize for economics, who first hypothesised that an individual’s spending habits were based not only on current income but also on anticipated future income. This idea, from his 1957 book <a href="https://www.nber.org/books/frie57-1">A Theory of the Consumption Function</a>, has become known as as the “permanent income hypothesis”. Typically those who are younger and well-educated have greater expectation that their income will increase over time, and will therefore be more inclined to borrow money to fund current consumption. This explains why almost a quarter of Zip customers are under the age of 24, and more than 60% are under 36. It also helps explain why items bought using Zip are mostly non-essential. By drilling down into the data behind the figures in Zip’s <a href="https://www.asx.com.au/asxpdf/20180928/pdf/43yrz8lys9lzvk.pdf">2018 annual report</a>, we know customers are using Zip to pay for fashion items, clothes and restaurant meals, rather than to pay energy bills or buy medicine. <hr /> <iframe id="1Wadd" class="tc-infographic-datawrapper" src="https://datawrapper.dwcdn.net/1Wadd/3/" height="400px" width="100%" style="border: none;" frameborder="0"></iframe> <hr /> Easy access to credit also encourages individuals to take on more <a href="https://www.jstor.org/stable/2077863?seq=1#page_scan_tab_contents">debt</a>. Not surprisingly, research by the <a href="https://download.asic.gov.au/media/4957540/rep600-published-07-dec-2018.pdf">Australian Securities and Investments Commission</a> shows the majority of “buy now pay later” users admit easy credit has led them to spend more money, with one in six reporting some negative impact as a result. These impacts include becoming overdrawn, borrowing money from family or friends, or using another loan provider to cover their debts. For savvy consumers confident they can manage their finances, willing to pay that quasi-interest rate to fund their immediate consumption desires, Zip’s service may make sense. But don’t get carried away by wishful thinking and overconfidence. Without financial discipline and proper budgeting, it’s an easy path to over-commitment and financial hardship. Written by Saurav Dutta, Head of School at the School of Accounting, Curtin University; Harjinder Singh, Senior lecturer, Curtin University, and Nigar Sultana, Senior Lecturer, Faculty of Business and Law, Curtin University. Republished with permission of <a rel="noopener" href="https://theconversation.com/how-zip-pay-works-and-why-the-extra-cost-of-buy-now-pay-later-is-still-enticing-110429" target="_blank">The Conversation</a>.

Retirement Income

Kmart fans go crazy over discount store's exciting new plan

Elated Kmart fans are rejoicing as the major discount department store has announced that they’re introducing Afterpay. The service allows people to pay for items in four equal instalments every fortnight. If the repayments are made on time then there is nothing extra to pay, but a late fee is charged if you miss a payment. Kmart announced via Facebook that it would release further information regarding its partnership with Afterpay for online services. <iframe src="https://www.facebook.com/plugins/post.php?href=https%3A%2F%2Fwww.facebook.com%2FKmartAustralia%2Fposts%2F1803284346437144&width=500" width="500" height="211" style="border: none; overflow: hidden;" scrolling="no" frameborder="0" allowtransparency="true" allow="encrypted-media"></iframe> The post has garnered major attention as it has been liked over 13,000 times. “This is great,” said one shopper. “If you all keep to a budget it’s the best thing for Christmas, birthdays, or if you need something in a hurry.” Others were worried that this will further fuel their shopping addiction: “My dream has come true … but now I shall be forever in debt hahaha no just joking.” One husband was worried about his future: “Now I have to lock my wife in a cage without internet access. I’ll tell her that you miss her ….” But it wasn’t positive reactions all around, as some were far less enthusiastic, saying people who could not afford to shop at the retailer shouldn’t be shopping at all. “Can see all the people getting into debt over this," said one woman. Many were confused as they questioned the difference between Afterpay and lay-by but one man pointed out that with Afterpay, shoppers receive the product on the spot while paying it off in eight weeks. Kmart has a cult following with many new items selling out the moment they land on shelves, which has seen the company's profits lift significantly to over $500 million a year. Are you excited by this news? Have you used Afterpay before? Let us know in the comments below.

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‘Similar to ordering a pizza’: how buy now, pay later apps influence young people’s spending

Afterpay enters Aussie pubs, experts warn of “debt spiral”

"Disturbing" Rebel Wilson ad slammed by experts

Why the extra cost of ‘buy now, pay later’ is still enticing

Kmart fans go crazy over discount store's exciting new plan

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