Buy now pay later fees surge, causing some to skip meals: ASIC

Buy now pay later fees surge, causing some to skip meals: ASIC

One in five people using services such as Afterpay and Zip Pay were skipping essentials like meals in order to make their repayments on time and avoid paying late fees, a regulator has found.

Fintechs offering buy now pay later services made about $43 million in late fees for the 2019 financial year, ASIC’s latest Buy Now, Pay Later report found, which is 38 per cent more than the year before.

The report -- based on data from six providers, four banks and a consumer spending survey -- found that 21 per cent of people using the services were being charged late fees.

And that, out of the 1.1 million late transactions, 45 per cent were being hit with them multiple times.

“Buy now pay later arrangements are clearly popular as a payment method,” ASIC said. “While working for the majority of users, some consumers are suffering harm.”

Based on the collective data analysed by ASIC, from providers AfterPay, BrightePay, Humm, Openpay, Payright and Zip Pay, revenue jumped by 50 per cent in a financial year, from $266 million in 2018 to $398 million in 2019.

Some skip meals to make payments on time

Buy now pay later services make it possible for people to make purchases now and repay them over a series of instalments -- typically four. They generally charge late fees rather than interest and also make money from their relationships with retail stores.

But ASIC’s analysis found some customers are making purchases they can’t afford to repay on time, and that they’re having to go without to make ends meet.

About 20 per cent of 1655 people surveyed said they cut back/went without meals and other essentials, while 15 per cent said they had taken out an additional loan.

And about half of these people were aged between 18 to 29.

“It’s alarming if people are prioritising buy now pay later debts over essentials, or paying off other interest-charging loans," Gerard Brody said, chief executive of Consumer Action Law Centre. 

"The best way to address this and limit the harm is to apply responsible lending obligations and other credit laws to the buy now pay later sector."

Buying with Afterpay, but spending more on credit cards

The Australian Securities and Investment Commission (ASIC) identified a concerning pattern by looking over the banking data of buy now pay later users.

“We found that a consistently higher proportion of buy now pay later credit card users incurred interest charges on their credit cards: between 66 per cent and 73 per cent for all months between October 2018 and January 2019 inclusive,” ASIC said.

“In the same period, only 42 per cent to 46 per cent of other credit card users incurred an interest charge on their credit card.”

Buy now pay later credit card users also showed a higher proportion of interest charges incurred on their credit cards in a comparison of gender and age ranges.

More people are buying now, paying later

Buy now, pay later services are more popular than ever. About 16.8 million purchases were made using the emerging technology in the 2018 financial year, but that number increased by a whopping 90 per cent in 2019.

There were more than 6.1 million open accounts as of June 2019, ASIC said, representing up to 30 per cent of the Australian adult population.

And these accounts could be used to make purchases at a combined 56,000 stores.

AfterPay is the largest provider of buy now pay later services, accounting for 73 per cent of $5.6 billion in transactions in 2019, followed by Certegy and Zip Money, which accounted for 11 per cent each.

Regulation and a code of practice

The buy now pay later category is not governed by the National Consumer Credit Protection Act, making it easier for people to sign up to the service, but regulatory standards and a code of practice are being developed.

ASIC’s design and distribution obligations will require buy now pay later companies to target customers who can afford their products. The requirement is intended to focus on promoting good consumer outcomes, ASIC said, rather than imposing “prescriptive compliance obligations”.

There’s an expectation buy now pay later companies will review the outcomes of their customers, and consider if changes should be made to the product, the way it’s sold or the target market.

But the fine details won’t be decided by ASIC. “Policy and regulation of the buy now pay later industry remain a matter for Government and, ultimately, the Parliament,” the regulator said.

Meanwhile, the buy now pay later industry is working on a code of practice, but it won’t be published until March next year.

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Learn more about savings accounts

Should I open a Commonwealth locked savings account?

If you have trouble saving money, a Commbank locked savings account could be a potential solution. A locked savings account won’t let you make withdrawals and as such, it can help you grow your savings balance if you keep topping it up. 

The Commonwealth locked savings account advertises high-interest rates and minimal maintenance fees, along with a host of other incentives that will encourage you not to touch the money. 

The account offers a higher interest rate for each month that you make limited or no withdrawals, as well as regular deposits. 

To qualify for a Commonwealth locked savings account with the advertised features, you will need to fulfil specific criteria such as:

  • Depositing a fixed minimum amount into the account every month.
  • Making a fixed number of deposits each month.
  • Making a minimum or no withdrawals each month.
  • Maintaining a minimum account balance.

How to open a savings account for my child?

Some banks and financial institutions allow parents to open a bank account for their child as soon as it is born, and start depositing funds to go towards the child’s future.

Children’s savings accounts generally don’t have fees, and are structured to help develop positive financial habits by limiting withdrawals, encouraging regular deposits, and earning interest on the savings, similarly to standard savings accounts.

Can you have a joint savings account?

Yes. Joint savings accounts can be useful for two or more people wanting to combine their savings to meet shared financial goals, including spouses, flatmates and business partners.

Some joint savings accounts require all parties to sign before they can access the money. While less convenient, this extra security can help encourage all parties to meet their shared financial goals.

Other joint savings accounts allow any of the account holders to access the money. These accounts can be convenient for financially responsible couples that trust one another implicitly. 

Can you set up direct debits from a savings account?

It’s not usually possible to set up a direct debit from your savings account to cover ongoing expenses or bills, as savings accounts are structured around growing your wealth by earning interest on regular deposits, and discouraging withdrawals.

Some transaction accounts allow you to set up direct debits and also earn interest, though you may not enjoy as much flexibility as a dedicated transaction account, or get as high an interest rate as a dedicated savings account.

How to make money with a savings account?

Savings accounts make you money by earning interest on your savings. The more money you deposit, the longer you leave it in the account, and the higher the account’s interest rate, the more interest you’ll be paid by the bank or financial institution, and the more your wealth will grow.

To make sure your savings account makes money and doesn’t lose money, it’s important to maintain a large enough minimum balance that the annual interest earned exceeds any annual fees charged on the account.

Can you set up a savings account online?

Yes. Several large and small banks offer online applications for savings accounts, and there are also online-only financial institutions to consider.

Online-only savings accounts are often less expensive than other savings accounts, though they may not offer the same flexibility, features, or face-to-face service as more traditional savings accounts.

How much money should I have in my savings account?

A good rule of thumb when working out a minimum balance for your savings account is to make sure that you’ll earn more in annual interest on your savings than what you’ll be charged in annual fees.

If you’re saving with a specific goal in mind, prepare a budget so the interest you earn on your deposits will help you efficiently reach this goal. Online financial calculators may be helpful here.

What is the interest rate on savings accounts?

As banks frequently change their rates, the most accurate way to look at interest rates on savings accounts is to use a savings accounts comparison tool. When you look at the savings rate check what the maximum and minimum rates are. Often banks will offer you a promotional rate for the first few months which is competitive, but then revert back to a base rate which can sometimes be less than inflation. Ongoing bonus rates are often a safer bet as they will keep rewarding you with the maximum rate, provided you meet their criteria

How does interest work on savings accounts?

The type of interest savings accounts accrues is called compound interest. Compound interest is interest paid on the initial deposit amount, as well as the accumulated interest on money you have. This is different from simple interest where interest is paid at the end of a specified term. Compound interest allows you to earn interest on interest at a higher frequency. 

Example: John deposits $10,000 into a savings account with an interest rate of 5 per cent that he leaves untouched for 10 years. At the end of the first year he will have $10,512 in savings. After ten years, he will have saved $16,470.

Can I overdraft my savings account?

A lot of savings accounts won’t let you overdraw. Some will allow this feature but you’ll need to apply first. It’s best to read the fine print and check with your lender whether this is a feature they offer. It can be a helpful addition, but as your lender can charge you a fee as well as interest for going into negative numbers, it’s best to avoid overdrafting when possible.

How do I open a savings account?

Opening a savings account is a relatively simple process. If you’ve found an account with a suitable interest rate, you’ll just need to get in contact with your chosen lender via a branch, phone call or hop online to begin the process. 

You may be required to provide:

  • Personal details, including identification (driver’s license, passport etc.)
  • Tax file number
  • Employment details

What is a good interest rate for a savings account?

A good rule of thumb to keep in mind with savings accounts is to look for a rate that is higher than the CPI inflation rate. This number is constantly changing, so check the Reserve Bank of Australia’s page. If you aren’t earning interest above this then the value of your money will go backwards over time.

Can you direct deposit to a savings account?

Yes. You can make one off payments or set up regular direct deposits into a savings account. This can be organised easily through online banking or by making deposits in a branch. Talk to your lender to find out the easiest way for you to set up direct deposits.

Who has the highest interest rates for savings accounts?

As banks frequently change their rates, the most accurate way to know who currently has the highest interest rate is to use a savings account comparison tool.