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Afterpay (ASX:APT) share price underperforming after ASIC finds more BNPL customers falling behind

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The Afterpay Ltd (ASX: APT) share price is underperforming the after the government released its latest findings on the sector.

The Afterpay share price dipped 0.4% to $101.40 while the S&P/ASX 200 Index (Index:^AXJO) rallied 1.2% this morning.

The Australian Securities and Investments Commission (ASIC) released its latest report, which found that more customers are falling behind on payments.

APT share price falls on ASIC findings

ASIC found that 20%, or one-in-five buy now, pay later (BNPL) users, are missing payments. This compares to one-in-six back in 2018 when the last study was undertaken.

The increase in customers that are likely being hit by late fees comes as popularity of BNPL services explodes.

“Notably, the number of buy now pay later transactions increased from 16.8 million in the 2017-18 financial year to 32.0 million in the financial year 2018-19, representing an increase of 90%,” said ASIC in a media statement.

“In the 2018–19 financial year, missed payment fee revenue for all buy now pay later providers in the review totalled over $43 million, a growth of 38% compared to the previous financial year.”

Fee revenue increasing

It’s also worth noting that Afterpay enjoyed 49% increase in customer late fees in FY20 to $68.8 million. This equates to around 16% of total income.

The increase is likely driven by the growing number of users on its platform as opposed to a higher proportion of customers running into financial strife.

This means Afterpay may be better placed than some of its rivals, like the Zip Co Ltd (ASX: Z1P) share price.

The Australian Financial Review reported that around 60% of Zip’s income comes from customers.

No new regulation expected

Another bright spot is that ASIC isn’t changing its tune when it comes to additional regulations for the industry.

The regulator is instead allowing BNPL organisations to develop a code of conduct to supplement the new “design and distribution obligations” that will come into force from October next year.

Nonetheless, ASIC’s latest findings could put more pressure on the BNPL sector to reign in fees or face a potential backlash that could prompt the government to impose new rules.

That would be the worse case outcome for ASX-listed BNPL companies, especially given the lofty multiples they are currently trading on.

The ASIC report reviewed services from Afterpay, Zip Co, FlexiGroup Limited (ASX: FXL), and Openpay Group Ltd (ASX: OPY), among others.

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Returns as of 6th October 2020

Brendon Lau has no position in any of the stocks mentioned. Connect with me on Twitter @brenlau.

The Motley Fool Australia's parent company Motley Fool Holdings Inc. owns shares of ZIPCOLTD FPO. The Motley Fool Australia owns shares of AFTERPAY T FPO. The Motley Fool Australia has recommended FlexiGroup Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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