The Afterpay Ltd (ASX: APT) share price is trading lower on Monday after responding to a report by ASIC.
At the time of writing, the payments company's shares are down 0.5% to $101.40.
What did Afterpay announce?
This morning Afterpay responded to the latest report from ASIC in relation to the Buy Now Pay Later (BNPL) industry.
The company notes that the report highlights ASIC's new product intervention power and the forthcoming design and distribution obligations that will play an important role in promoting good consumer outcomes.
The report also comments that there is a significant role for industry self-regulation, with broad industry support and commitment to ensure good consumer outcomes.
Afterpay notes that this is consistent with the Government's Senate Select Committee on Financial Technology and Regulatory Technology, which recommended regulation that is fit-for-purpose and considers the various emerging products and business models.
Furthermore, ASIC's report recognises the significant shift from traditional forms of payment and the decline of credit cards usage. Consumers are benefiting from more choice as competition from newer players is expanding a previously narrow, bank dominated payments industry.
Why Afterpay is different.
In respect to the BNPL industry, ASIC's report refers to BNPL as a collective term to describe a range of new businesses with fundamentally different business models.
And while Afterpay is easily the largest of the companies profiled with 73% of the total value of BNPL transactions, it represents a relatively small proportion (27%) of BNPL related consumer debt.
Management advised that this is a result of Afterpay's differentiated business model that is unlike traditional credit or other BNPL providers, with built-in consumer protections that ensure average transaction values remain the lowest. Afterpay's average transaction value is $147, compared to others with as much as $8,000.
It also notes that payment terms are strictly short-dated, 6-8 weeks versus up to 60 months, and customers cannot revolve in large or accumulating amounts of debt.
In addition to this, it notes that customers are immediately suspended from using Afterpay if they miss a single instalment payment. And unlike other providers, Afterpay does not rely on customers to drive revenue, generating the majority of revenue from merchants (over 85% in FY20). Further, Afterpay customers prefer debit cards over credit cards, with over 90% of all transactions in Australia linked to debit cards.
Management points out that key metrics relevant to positive consumer outcomes have continued to improve since ASIC's review period (2018 – 2019). One of these is Afterpay's Gross Loss, which is currently industry leading (<1% globally in FY 2020). Another is late fees as a percentage of underlying sales, which has reduced to <14% globally in FY 2020.
Financial stress.
The release advises that ASIC's consumer research identified the potential for financial stress among users of different financial products categorised as BNPL.
However, Afterpay's own research of 144,000 customers found that there is no causal link between spending on Afterpay and changes in spending on essentials.
It notes that for customers who find themselves in trouble, Afterpay offers a generous and accessible hardship program where flexible payment timelines with no additional fees or cost can be agreed upon. Furthermore, Afterpay has never enforced a debt nor does it sell debts to collection agencies.
The company concluded: "Afterpay looks forward to participating in the Government's upcoming review of the regulatory architecture of the Australian payments system, including whether the general policy and regulatory framework adequately accommodates new and innovative technology, such as the BNPL sector."
"Afterpay remains committed to our customers and to working with ASIC, the Government, industry, consumer groups and all stakeholders to promote consumer protection outcomes and a competitive Australian FinTech industry."
