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Afterpay says it 'rejects' the notion of performing credit checks on its customers. Here's why their arguments don't add up.

Jack Derwin
  • Afterpay co-founder and CEO Anthony Eisen has said the company "rejects" the notion of credit checks in its submission to a Senate Committee on fintech regulation.
  • In a broad defence of the Afterpay model, Eisen wrote that such checks were "irrelevant" given they are a lagging and incomplete indicator, and that's its younger customer base doesn't always have a credit history.
  • It's Afterpay's latest defence as it continues to fight efforts to see legal oversight tightened on the largely unregulated buy now, pay later companies.
  • Visit Business Insider Australia's homepage for more stories.

Afterpay has gone out on the defensive yet again, as calls for it to be brought into line persist.

In a supplementary submission to the Senate Committee on Fintech, the buy now pay later giant has once again tried to mount an argument against increased regulation.

Specifically, it says it "rejects this notion" that Afterpay should somehow be required to conduct credit checks.

"Credit checks are a lagging customer indicator, are unhelpful for younger adults with no credit bureau history, and often provide an incomplete picture of a customer," managing director and CEO Anthony Eisen wrote.

The problem with this analysis is that none of these three reasons is exclusive to Afterpay or the buy now pay later sector more generally. Indeed, their largest competitors – banks and credit card companies – could easily make the same argument despite being subject to credit regulation for years.

"Despite Afterpay not conducting credit checks, our technology has seen our customer losses fall over time," Eisen said.

While that's certainly a win for its customers, it seems irrelevant if credit checks or other regulatory measures might help stymie customer losses further – an objective that Afterpay should champion. It is after all good for business. As Eisen himself said in February, "losses come down and profitability goes up".

That's when Eisen plays the COVID-19 card.

"During the COVID-19 crisis, where traditional lenders have committed to suspending the reporting of adverse credit information to credit bureaus for many months (which is the right thing to do), credit checks are even less meaningful," he wrote.

Perhaps Eisen is confused. This is not the special Senate Committee on COVID-19. It's the one on fintech regulation. Not for the next three or six months, but for the long haul. While all lenders may well be within their rights to suspend credit reporting during the pandemic, what about after?

As in its other submissions, rather than have one coherent argument Afterpay seems prone to throw everything at the wall to see what might stick. In the past, it's contorted itself into all kinds of shapes, going as far as to suggest it is more similar to Facebook and Google than a payment platform. In lieu of real regulation, it led the drafting of a voluntary and non-enforceable set of minimum standards for the sector to sign onto.

At the same time, others like Zip and SplitIt have warned a lack of regulation actually leaves consumers vulnerable.
It's not to say that the terms BNPL companies offer aren't favourable to those offered by credit cards. As Eisen says, Afterpay "never charge[s] our customers interest, our late fees are capped at a low level and we suspend customers from further transactions as soon as they miss a repayment".

Those features are certainly leagues away from 20% plus interest, plentiful fees, and cases of harmful credit cycles, where Australians max out credit cards to service older debts. However, simply being a cheaper or a superior product isn't an argument in and of itself against regulation unfavourable to your bottom line. It's also not to say fees are non-existent. More than 15% of Afterpay's income is generated by late fees, according to its latest results.

As a fast-growing major challenger to credit cards, Afterpay and others should be able to stand on their own two feet, and not simply be granted regulatory concessions. After all, as the largest buy now pay later company in Australia, with 3.2 million active local customers, Afterpay would in all likelihood be able to absorb regulation far better than many of its rivals.

It should also be acutely aware of the costs of falling afoul of regulators after its tangle with AUSTRAC over money-laundering concerns cost it $3 million.

The driving force behind fintech is that they are challengers to what can sometimes be engorged, complacent incumbents that – as the financial services royal commission amply found – often put profits before people.

Fast-growing challengers like Afterpay should, you would think, strive to do the opposite.

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