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Australia’s Afterpay Obsession: A report into the features, buying habits and traps of the modern day layby

When stepping up to pay at the checkout Australians have traditionally reached for one of two things - card or cash. According to RBA statistics from 2016, 52% of all payments in Australia were made with a debit or credit card and 37% were made using cash.

But there’s a new option in town. One which is challenging the traditional payment instruments both in-store and online: Afterpay.  

Launched in 2015, Afterpay has proved a revelation in Australia, with 2.2 million people having made a transaction on the platform as of July 2018. Available in around 10,000 individual shops throughout Australia and New Zealand, the service is available everywhere from Jetstar to Big W and a host of other major retailers.

Dubbed the ‘modern day layby’, Afterpay is used by many Aussies as a simple, alternative payment solution to their shopping needs - the major appeal being that users can make purchases without an upfront payment. Instead, shoppers are simply required to make four equal fortnightly repayments starting two weeks after the purchase date.

But while there’s no doubting the meteoric rise and ongoing popularity of Afterpay, there are concerns that the platform may be contributing towards increased financial stress among some shoppers. In fact, new research from Mozo has uncovered some worrying figures surrounding the spending behaviour of Afterpay users.

Key Points

  • 30% of Mozo survey respondents admitted to having missed at least one Afterpay payment
  • 65% said the ability to make smaller payments influenced them to make purchases they wouldn’t normally make
  • Luxury purchases top the list of most frequent Afterpay purchases, with 60% of respondents stating that they mainly used the platform to buy clothing

Afterpay explained

From clothes to electronics and even pet accessories, Afterpay allows shoppers to purchase items upfront without needing to pay on the spot. Payment then comes via four equal, fortnightly repayments spread out over a 2 month period. Pretty straight forward right?

Here’s an example.

Emma is a regular Afterpay user, having linked her debit card to the platform when she first signed up.  

She’s in need of a new pair of jeans and a couple of shirts, which she’s decided to purchase from her favourite online clothing store. So instead of using her debit or credit card when it comes time to pay the $234 balance at checkout, she uses Afterpay instead.

Once Emma’s paid she won’t actually be direct debited until the following fortnight. So if she bought her jeans and shirts on September 1st 2018, her first Afterpay repayment of $58.50 (a quarter of the total) would be due on September 15th, her second on September 29th, her third on October 13th and her fourth on October 27th.

Are there any exceptions?

While the example above is typical of many Afterpay experiences, there are a few exceptions. For instance, for purchases over $500, orders in-store or if it’s the first time you’re using Afterpay, you’ll need to make your first repayment at the time of the actual purchase.

Does Afterpay charge fees?  

Afterpay is free to use and you won’t need to pay any sign-up or ongoing fees, however, it does charge late fees on missed payments. That means that if your payment isn’t processed on or before the due date you’ll be charged an initial $10 late fee, followed by a further $7 fee if your payment continues to remain unpaid 7 days after the due date.

For orders less than $40, Afterpay will only charge one $10 late fee. However, for those above $40, the amount of late fees which you could be charged are capped at 25% of the value of the purchase or $68 - whichever is less.
How is Afterpay different from a credit card?  

Unlike a credit card, Afterpay doesn’t charge interest on purchases. In fact, Afterpay isn’t regulated by the Australian Prudential Regulation Authority (APRA) because it’s neither a bank or a non-bank lender and it doesn’t have any obligations under the National Credit Code.

Afterpay only charges its customers fees on late payments. However, that doesn’t mean that Aussies using Afterpay won’t be be charged interest on purchases they make through Afterpay! But we’ll explain that a little later on.

How does Afterpay make money?

At this point you’re probably wondering how Afterpay actually makes its money. While approximately 24% of its revenue does come from fees, the rest of it comes from charging retailers to use the service.

Who uses Afterpay?

So now you know how Afterpay works, but how are Australians actually using it? In order to delve into the habits of Afterpay users, Mozo commissioned a nationally representative survey in July 2018 of over 1,000 Australians from a range of age groups and locations.

Using the responses from those surveyed, we’re now able to shine a light on just how often Aussies are using Afterpay as a payment platform and what they’re actually using it for. 

A look at the 'typical' Afterpay user

  • Loyalty: 36% of Afterpay customers have been using the platform for a year, while a further 31.2% have been using it for 2 or more years. 
  • Online or in-store: 56% of respondents said they typically used Afterpay online through a retailer’s website, followed by 29% who used Afterpay in-store. 
  • Number of purchases: The majority of respondents (65%) said that they typically had 1-2 Afterpay payments on the go each month, while 29.3% admitted that they had as many as 3-5 on the go at once. 
  • Payment choice: 45% of those surveyed said they were using Afterpay more often than a debit or credit card! Although cards still remained king for 55% of those surveyed.

What are Australians buying on Afterpay?

Chances are you’ve seen the Afterpay logo in a clothing store next to the cash register. Well as it turns out, that’s exactly what a large number of people are using Afterpay for - buying clothes. According to the Mozo research, over 60% of users reported that the most frequent items they used the platform to buy were clothes, followed by home and entertainment products and appliances and electronics.

Afterpay users were also found to be using the platform more often that not to buy luxury items rather than basic necessities.

  • 56% used Afterpay to purchase luxury items like clothing, pet accessories and car accessories.
  • 36%  used Afterpay to buy necessary items like new beds, appliances and other functional household items.
  • 8%  used the service to buy food and other necessities.

Are there any catches to using Afterpay?

Buy now, pay later. Four easy payments. No interest.

It’s not hard to see why Afterpay is an attractive payment option for many shoppers. But while there are certainly a range of benefits when it’s used savvily, the platform has also raised a fair share of concerns.

“The popularity of Afterpay has taken Australia by storm, but we are urging Afterpay users to think carefully about potential purchases. A $100 pair of jeans broken down into fortnightly payments of $25 is very appealing, especially when you can take home the goods on the spot, but you still need to pay for that product in full,” said Mozo Director, Kirsty Lamont.

“Afterpay is highly appealing to shoppers who don’t have the money on hand to make a purchase in one payment, and therein lies the risk. Small payments are snowballing for some users, resulting in late payment fees, potentially poor credit ratings and spending beyond one’s means.” 

Buyers remorse

Along with surveying respondents on the ways in which they use Afterpay, Mozo also discovered that many users reported some concerning spending habits when it came to using the platform.

  • Missed payments: Nearly 1 in 3 respondents (30%) said they had missed at least one Afterpay payment.
  • Hidden spending: 30% of those surveyed admitted to having concealed their Afterpay spending from a partner or parent. 
  • Buying more: Perhaps most concerningly, 64% of respondents said that being able to make smaller, spaced out payments was actually influencing them to make purchases they wouldn’t have normally made had they been upfront, single transactions.

When analysing the survey figures, Mozo also found that men were generally faring worse than women when it came to bad Afterpay habits, as were younger users. 

A number of key points from the survey were assessed and weighted to come to this conclusion, including: the number of missed payments, the propensity to hide spending from loved ones, the feeling that their Afterpay spending was out of control, the number of payments on the go and the feeling of financial stress. 

The analysis concluded that men in the 18-24 age group had the worst habits of all Afterpay users, followed by men in the 25-34 age group. Meanwhile, 18-24 year olds proved to have the worst Afterpay habits among women.

Interest free? Probably... 

As we mentioned earlier on, one of the main benefits of using Afterpay is being able to make purchases without paying interest. But what may surprise some users then is that they can can still rack up interest as a result of their Afterpay spending - via a linked credit card that is.  

When signing up, Afterpay gives users have the option of linking either a debit or credit card to their account which is used to make repayments. So if you did choose to link a credit card and you’re not paying off that balance in full during the interest-free period you’ll start to pay interest.  

Of course this would end up defeating the purpose of using Afterpay in the first place. So users may be better off avoiding linking a credit card to their accounts - especially if they know that they’re likely to be carrying a balance as a result of any Afterpay purchases.

Afterpay and your credit history

According to the Mozo survey, 36% of respondents weren’t aware that the way they use Afterpay could have an impact on their credit rating. But just like a credit card, bad payment habits with Afterpay could come back to bite. 

“While the payment platform doesn’t rely on users racking up credit, missed payments can affect their credit rating and incur additional costs,” she Lamont. 

In fact, it’s right there in the Afterpay Australia terms of service: “... Afterpay reserves the right to report any negative activity on your Afterpay Account (including late payments, missed payments, defaults or chargebacks) to credit reporting agencies.”

How to spend successfully with Afterpay

While there are certainly a number of potential traps and bad habits that are best to avoid when using the service, that doesn’t mean Afterpay can’t be an effective payment option. After all, 85% of respondents to Mozo’s survey considered their Afterpay spending to be under control. But like all payment instruments, there can be smarter ways to spend.

“If you’re going to use Afterpay, be savvy and consider your incomings and outgoings. If you’re walking out of a shop with a product today, can you afford the payment in a fortnight or a month? If the answer is no, you need to consider the implications of poor credit ratings and additional costs through potential late payment fees,” said Lamont.

Here are a couple of simple ways to become a smarter Afterpay user:

1. Set and stick to a spending limit: One of the major takeaways from Mozo’s research was that the allure of smaller, ‘bit-sized’ payments made it easier for Afterpay users to spend than it normally would. That’s why sticking to a pre-planned budget and focusing on the total purchase price, not just the first installment, could be the best way to ensure you don’t end up regretting your spend. One way to do this is to allocate a portion of your weekly or monthly budget to ‘clothing’ or ‘fun things’, and sticking to it!

2. Set up Afterpay with a debit card: The convenience of using Afterpay should be in paying no interest and having a longer time to pay off your purchases. So if you know you’re not going to be able to meet your regular Afterpay repayments, it doesn’t make a lot of sense to link your credit card to your Afterpay account. Instead, link a debit card to your account, and only make purchases when you know you have funds in your account to make your fortnightly repayments in full.  

3. Set up payment reminders: Let’s be honest, remembering to transfer funds into your account every fortnight, let alone when it’s over a two month period, is going to be a bit of a stretch for most of us - especially if you’ve got multiple different orders on the go! So to avoid copping any late payment fees make sure you set up payment reminders in advance.   

4. Consider alternative payment options: If you’re really finding it difficult to use Afterpay without either racking up late fees or spending more than you would normally on clothes or other items, it might be time to use an alternative payment option. Paying upfront with cash or a debit card could make your purchases more realistic rather than Afterpay’s smaller, delayed chunks which, while perhaps more psychologically desirable, might not be so great for your budget.

Quickfire Afterpay FAQs

How do refunds work? 

Afterpay suggests users to contact the merchant or retailer they made the purchase from, because the refund will need to passed on from the merchant to Afterpay and then on to the buyer. 

Is there an Afterpay app?

Yup, there’s an Afterpay app for both iOS and Android.

Can I pay off my Afterpay balance early?

Absolutely! Afterpay actively encourages early payments, so you’ll just have to log into your account and select ‘Payment Schedule’ to begin.

Does Afterpay have a financial hardship program?

If you’re finding it difficult to keep up with your repayments Afterpay urges you to get in contact with them as soon as possible so they can potentially provide support.

How old do I need to be to sign up for Afterpay?

There’s a minimum age of 18, plus you’ll also need to hold an eligible debit or credit card.

Is there a spending limit?

Yes. If you’ve linked a debit card to your account you can’t have more than $500 in outstanding payments or your next purchase won’t be processed. The same applies for a linked credit card, but the limit is $1,500.

Are there similar payment platforms?

Afterpay is just one payment platform, with similar offerings in Australia from zipMoney and Openpay.

Tom Watson
Tom Watson
Finance journalist

Tom Watson is a financial journalist at Mozo and co-host of the Finance Burrito podcast, specialising in fintech, property and business banking. Whether it’s reporting on banking trends or uncovering the latest product innovations, Tom’s mission is to keep our readers up to date with breaking Australian financial news. His work is often sourced in the media and across social media channels. Tom has a degree in Journalism from the University of Technology, Sydney. He is also ASIC RG146 (Tier 2) certified for general advice.