I acknowledge the work and innovation [Afterpay has] undertaken to build such large and successful company and avoiding all of that regulation is quite a feat, Mr Comyn said.
Because Afterpay does not report customer positions into credit agencies (nor does it use credit files to assess customer risk), Mr Comyn said it was hard for other lenders to see the extent of buy now, pay later debt.
But CBAs own analysis suggests users of the popular payment apps are riskier. He said hardship rates are double that of non-BNPL users, and buy now, pay later users have higher arrear rates on credit facilities.
We see roughly buy now, pay later users having twice as much credit on their credit facilities, and typically on their credit cards [and] they have more credit products, he said. That is what we can see. But a number of buy now, pay later providers dont contribute to comprehensive credit reporting.
I would suggest the line around innovation in this area is skewed to a complete absence and lack of regulation in a number of areas… he said.
The government does and should have a posture towards new players to facilitate and encourage innovation, but my point is based on size and scale – they are beyond the point where the legislation framework that applies to that sector needs to be comprehensively reviewed.
Afterpay rejects assertions its customers are riskier; it says research conducted by AlphaBeta in 2020 found the personal liabilities of Afterpay users are lower than the general population.
Reserve Bank governor Philip Lowe said in December that the buy now, pay later sector, which represented only about 1 per cent of all payments, was too small to regulate under the no surcharge rules that apply to credit cards. But he said regulation is likely when it got bigger. The RBA is discussing with players where to set thresholds for intervention.
Mr Comyn argued that time had already arrived, given Afterpay recently hit a market capitalisation around 85 per cent the size of Macquarie.
I dont think it is unreasonable, given size of market, the scale of the individual players in one instance being an ASX 20 company to make an investment in understanding their customer circumstances and financial position, [and] to be able to report to credit reporting agencies, he told the committee.
And I also think it is appropriate for the businesses accepting buy now, pay later providers, who are effectively incurring costs somewhere between 3 and 6 per cent, should be entitled contractually to pass on costs to consumers incurring those costs for them.
Westpac CEO Peter King, appearing before the committee in the afternoon, agreed it was appropriate that non-bank payments players should be treated in the same way as banks when they reach a tipping point, and said the RBA is currently examining whether buy now, pay later players have reached this level.
CBA and Afterpay have been boxing for many months, as Afterpay tries to lure young customers and attacks banks once-profitable credit card books. The drama has been heightened by Afterpays entry into banking through a deal with Westpac, which forced CBA to launch its own BNPL product in March, undercutting Afterpay on merchant fees in an attempt to retain customers seeking to pay instalments.
CBA is conducting credit checks for its new no-interest credit card and its buy now, pay later product, even though the law does not require it to do so. Mr Comyn said this is resulting in a slower onboarding process than the fintechs, but the bank considers credit checking the right thing to do.
But he suggested the Parliament could consider allowing banks to operate with less regulation in order to remain competitive. Of course there could be opportunities to streamline the regulatory environment for large financial institutions, he said.
Mr Comyn was forced to defend the late fees attached to its new buy now, pay later product, which came under attack from deputy committee chairman Andrew Leigh. CBAs late payment fee is capped at $120 per annum, per customer, whereas Afterpays cap of $68, or 25 per cent of the transaction value, relates to a single purchase. Mr Comyn suggested CBAs cap is lower if an Afterpay customer is late on more than one transaction in a year and hits the maximum fee.
Afterpay has argued that it should not be subjected to Reserve Bank regulation because it provides a range of services to merchants, including providing them with new business. But Mr Comyn said the payment fee could be unbundled from any lead generation service and the RBA could regulate effectively for the payment.
He said a COSBOA survey had shown only 45 per cent of businesses accepting buy now, pay later reporting an uptick in business from lead generation and the cost of the services suggested 70 per cent of the customers coming through buy now, pay later need to be new, incremental customers to offset the higher cost to the business.
Buy now, pay later was at least four times more expensive than a credit card, he said, and merchants who are wearing that cost arent able to pass those costs on to customers, so they can either absorb the costs themselves or pass them on to consumers in the form [of] higher prices, and definitely non-buy now, pay later users are cross subsidising buy now pay later users.
Mr King agreed that in the absence of a mechanism for merchants to pass through payments costs, they will get averaged into their costs and spread into their business.