Afterpay and the pitfalls of ‘buy now pay later’


The concept of ‘buy now, pay later (BNPL)’ is not new; however, in Australia, it is a sector that has seen considerable growth over the last few years. Driven by a change in buying habits caused by the pandemic, it is now estimated that over 2 million Australians use this financing each year to facilitate their purchases.

As a result of this growth, the rise and growth of BNPL providers have been both substantial and inevitable. The largest of these companies is Afterpay, founded in 2014 by Nick Molnar and Anthony Eisen, and Zip, founded in 2013 by Larry Diamond and Peter Gray.

However, despite Afterpay and Zip achieving huge historical success in the sector, a BNLP crackdown looms. Ethical concerns with the business model and a lack of customer interest have seen both companies hit with considerable losses in revenue and reputation.

Let’s get to the following commonly asked questions:

  • What is Afterpay?
  • How does Afterpay debt work?
  • What type of debt is Afterpay?
  • What problems are BNPL businesses facing?
  • What has caused Afterpay’s struggles?
  • Are there advantages to the BNPL model?
  • What are the risks associated with BNPL?

Q1. What is Afterpay?

Afterpay is Australia’s biggest ‘buy now pay later’ company, founded in 2014 by Australian FinTech entrepreneurs Nick Molnar and Anthony Eisen. Its early success led to a launch into the US in 2018 and the UK the following year. Its growth increased during the pandemic, with more people turning to online shopping rather than in-person purchases.

In 2021, US-based technology company Block Inc. purchased Afterpay for US$39 billion. Although it remains the dominant force in the Australian BNPL sector, in 2022, Afterpay posted massive financial losses. These are thought to have been driven by a huge increase in operating costs and the total amount of dangerous money (or bad debt) owed.

Despite this, Afterpay still has an estimated 3.6 million customers in Australia and New Zealand, with a further 5 million in the US.

Q2. How does Afterpay debt work?

Afterpay works similarly to other types of credit and lending. The company has partnered with retailers worldwide to act as an alternative payment option for their customers on goods and services that exceed a value of $400.

As a BNPL company, Afterpay offers a type of instalment loan to customers approved for the use of its services. Once the purchase has been completed, customers can repay the loan over six or twelve months at pre-arranged fixed intervals.

Afterpay will use a soft credit check to assess a customer’s suitability for the loan, so approval is not necessarily guaranteed. As it is a soft credit check, it will not appear on a customer’s credit report or affect their credit score.

Afterpay does not charge interest on its loans. However, it does charge late fees on missed payments, which traditionally have made up the bulk of its revenue stream.

Q3. What type of debt is Afterpay?

Afterpay is short-term debt that allows you to borrow money to pay for goods and services and pay it off over a few weeks. It is one of the most popular forms of debt on the Australian financial market, but it can also lead to a debt trap if the loan isn’t paid off in the corresponding period as required. 

Q4. What problems are BNPL businesses facing?

Consumer group Choice has found that one in seven people who use buy-now-pay-later services like Afterpay or Zip had more than 20 loans in the past year.

The survey also found people were using BNPL services to pay for essential bills, with one in six people using it to buy groceries and 14% to pay for electricity. 

BNPL has become popular, but most companies that offer it have had trouble making a profit, which has hurt their share prices. The industry is facing a regulatory crackdown due to concerns about consumer debts.

Q5. Are there advantages to the BNPL model?

As with any form of borrowing, there is an element of personal responsibility and risk management involved. 

However, for those who have conducted their due diligence and can handle debt management sensibly, there are several potential benefits to using a BNPL model.

Most BNPL loans are interest-free.

You will always know exactly what needs to be paid back, and you will have far less risk of accumulating bad debt. When checking for eligibility, there is no risk to your credit score, and setup is usually simple and convenient.

For many people, a larger payment is often far more manageable when paid in smaller segments. Most individuals don’t have the level of disposable income to pay for expensive purchases in one go, so BNPL is often an appealing solution.

Q6. What are the risks associated with BNPL?

Any form of borrowing, including those from traditional lenders, should be treated with great caution for those in financial hardship. In the case of BNPL, you are essentially paying for goods and services with money you don’t have. 

As a result, if you cannot stick to your consumer credit payment schedule, you will incur late fees. These fees can be considerable and quickly add up, particularly if you are financially difficult. Failure to pay your loan instalments could bring debt collectors to your door and negatively impact your credit score.

In summary

The need for Buy Now, Pay Later as a form of payment is unique to every individual’s circumstances. For some, AfterPay, Zip or another Buy Now Pay Later company can act as genuine assistance for essential daily purposes. However, for others, the lure of not needing to pay anything upfront can lead to over-the-top, frivolous spending. 

Some BNPL companies will look to encourage and exploit this, so be aware and do your research before you sign up for anything. You should also take control of your debt management. You don’t want debt collectors knocking on your door.

Wait! We’d love to hear your thoughts

If you enjoy using our app, please take a moment to rate it in the App Store. Your feedback in the past has tremendously helped us at WeMoney to improve the app to help it be the best that it can be. A massive thanks to each one of you for making that happen!

Disclaimer: The author is not a financial advisor and the information provided is general in nature and was prepared for information purposes only. This article should not be considered to constitute financial advice. Accordingly, reliance should not be placed on this article as the basis for making an investment, financial or other decision. This information does not take into account your investment objectives, particular needs, or financial situation.

Turn your learnings into practice
Try WeMoney today.