Nobbling Afterpay would stifle competition and protect banks’ profits

If you never update, you don’t pay interest or other late fees. Eventually, Afterpay terminates its relationship with you and cancels the debt.

The individual amounts people borrow are usually only a few hundred dollars. You can have multiple loans outstanding at once, but only within the credit limit set by Afterpay, and only if your existing payments are up to date.

Afterpay initially sets a fairly low limit, but increases it as you demonstrate the reliability of your payment.

So what’s in it for Afterpay? It charges the store that sold you the product a merchant commission of approximately 4% of the sale price. I used to suspect that they make a lot of their late fees, but those are only a small portion of their total revenue, almost all of which comes from merchant fees.

Despite its huge expansion, Afterpay has yet to turn a profit, putting it in the same boat as Uber, Twitter, and other digital platforms. BNPL has had a lot more bad debt lately and the stock market has lost interest in them. This does not affect Afterpay, which was acquired by a large American fintech, Square, which has many other irons in the fire.

Obviously, Afterpay and its imitators offer BNPL an alternative to a conventional credit card, which is to charge merchants a few percent fee and offer interest-free credit. provided you pay your balance on time and in full each month.

Afterpay is truly disruptive, giving users what they can rightly consider a better product.

If you can’t keep going – as the vast majority of credit card holders can’t – you get interest on your exorbitant purchases of over 20%. These rates have not changed for decades while other interest rates have fallen. This is a sign that the banking oligopoly has enormous pricing power in the supply of consumer credit.

It seems clear from the declining growth of credit card debt and the incredible popularity of Afterpay and its imitators that people are crazy about credit cards and eager to switch to a cheaper form of BNPL. .

Many young adults, in particular, seem to have given up on credit cards because they’re just too tempting. Behavioral economists call this a “pre-commitment device.” The best way to make sure you don’t end up with ever-increasing debt is to not have a credit card in the first place.

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These people see Afterpay & Co as a far less risky route to BNPL, a ubiquitous practice that economists sanctify as “consumption smoothing.”

Those who want to regulate the new BNPL by preventing providers from prohibiting merchants from charging users additional fees – as they have prevented Visa and Mastercard from prohibiting additional fees – see this as a level playing field between the two different forms. from BNPL.

But Denniss insight is to point out that the two merchant fees are quite different. Credit card merchant fees can be thought of as transaction fees – i.e. simply covering administrative costs – but in the case of Afterpay, they cover much more than that, to justify its cost a lot. higher.

What Afterpay offers is something that marketers understand, but economists have yet to understand: better “customer acquisition”. Being able to offer free credit helps to acquire customers, but Afterpay does much more to attract customers to merchants who offer its BNPL service.

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Young consumers love the new BNPL so much that they search the internet for sellers of the item they want to buy who also offer Afterpay. Afterpay uses a store directory on its website – as well as its mobile app – to direct potential customers to participating merchants.

Afterpay also sends messages to its users to announce special offers from its merchants, etc.

Thus, Afterpay’s merchant fees also provide its merchants with a new form of advertising, reducing their need for online advertising via Google or Facebook.

Afterpay is truly disruptive, giving users what they can rightly consider a better product. Regulators should think twice before trying to discourage it by presenting customers with a misleading comparison: a 4% versus 2% merchant commission.

Ross Gittins is the economics editor.

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