Cash or card...or Afterpay?

Cash or card...or Afterpay?

It’s approaching the time of year where your bank balance normally takes a hit. Subsequently, more and more Australians are turning to non-traditional payment methods such as Afterpay, Zippay, Openpay and Oxipay to name a few. It’s impractical to talk about the intricacies of all these services, so this article will assume that buy-now-pay-later operations share similar business models. With that said, continual reference will be made to Afterpay, as it has established itself as the market leader in the space.

Modern day layby

For those who are not familiar with Afterpay, it essentially breaks down a purchase into smaller installments with the aim of making larger purchases more manageable during the times we’re financially challenged. For example, a $400 purchase can be paid off in four fortnightly debits of $100. This technology sounds simple enough but has seen some sweeping revolutions in the consumer spending area.

The end of credit cards?

The framework behind buy-now-pay-later companies drastically differentiates itself from traditional payment methods such as credit cards. Afterpay charges no interest on purchases nor does it levy ridiculous fees buried in the terms and conditions. In fact, only 20% of their revenue stems from late fees charged to consumers.[1] These late fees act merely as a proportionate incentive for customers to pay on time rather than an attempt to extract revenue. Taking a closer look, an initial $10 late fee will be incurred followed by an additional $7 if the purchase remains unpaid seven days after its due date. Any further delay results in the account becoming frozen.

More importantly, for orders above $40, late fees are either capped at 25% of the original order value or $68 – whichever is less.[2] As such, these numbers are in no way financially crippling as opposed to the damage credit cards can do from compounding interest on debt. Afterpay’s model enables this distinction by generating the majority of revenue (80%) from use of service commissions charged to retail stores. That is, Afterpay does not benefit when users are stuck in debt like credit card companies do.

Winners and losers

If Afterpay attracts more customers to retailers by enabling cash-strapped consumers to make purchases, and consumers win because they aren’t charged any interest on their short term debts, who loses? More specifically, who ends up with the debt when someone completely defaults on their purchase? Afterpay. When a transaction occurs, Afterpay pays the retailer the full, upfront price immediately thus taking on board any default risk associated with the customer. However, Afterpay is a public company listed on the Australian Securities Exchange (ASX), therefore, shareholders inherently take on this risk. If bad debts (those where the consumer cannot repay back the original product price) accumulate, Afterpay’s profit margin would fall. Lower earnings per share warrants lower share prices which ultimately destroy shareholder wealth.

Of greater concern, due to the low cost of late fees, Afterpay will have to rely on growth in commissions to increase earnings per share. Rest assured, this is yet to wreak havoc on the company’s bottom line as approximately 95% of instalment payments received in the 2018 financial year did not incur late fees.[3] Moreover, shareholders may instead be well protected against accumulating bad debt. Aforementioned, users have their account immediately suspended if payments are not made on time – avoiding revolving debt. However, despite our previous comparisons giving a grim outlook for credit cards, Afterpay has the option for users to link their credit cards. Therefore, if users are not paying off their credit card balances after their fortnightly instalments have been incurred, they will quickly find themselves back to square one with ballooning credit card debt. Old habits die hard.

Inducing poor spending habits, or a useful budgeting tool?

If you can’t pay for your $100 jacket upfront, it is unlikely you would be able to handle future events such as your car unexpectedly breaking down, so why is Afterpay so popular?  Although advertised as an essential tool for the savvy shopper, could Afterpay’s business model simply revolve around manipulating the psychology of consumers?

Interestingly, a survey by financial comparison site Mozo found 65% of users felt breaking up payments influenced them to make purchases they wouldn’t have made otherwise. This resembles the ‘left digit’ effect – the notion that consumers are more likely to buy a product for $4.99 than an identical one for $5.[5]  Ignoring the time value of money (as slightly delayed payment are too small to compound into a noticeable savings), are consumers more likely to buy a $10 product split into $2.50 fortnightly instalments than an identical one for $10 upfront? Possibly.

Furthermore, with the advancement in modern day technology, our need for instant gratification is at an all-time high. Writing a letter taking too long? Email. Can’t be bothered to drive to the cinemas? Netflix. Even a webpage that takes more than one second to load is enough to make our blood boil! It seems that Afterpay’s business model is to tap in to the unconscious minds of millennials to induce spending. Do we receive a higher utility by receiving a product immediately than in the future when we have adequate funds to purchase upfront? The substantial growth of Afterpay users in Australia seems to suggest so.

The disruptive industry of buy-now-pay-later services is growing at an unprecedented pace. Consumers must be aware of marketing tactics that may carry pernicious intentions – ultimately hindering your financial goals.


[1] FY2018 RESULTS PRESENTATION. (2018). Retrieved from

[2] Terms. (2018). Retrieved from

[3] Business Update (2018). Retrieved from

[4] Bagshaw, E., & Yeates, C. (2018). Afterpay, payday lenders and ‘debt vultures’ to face Senate inquiry. Retrieved from

[5] Krasny, J. (2018). Why Supermarket Price Tags Often End In 99 Cents. Retrieved from

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