The digital payment app Afterpay, popular amongst millennials, is facing criticisms that it causes "financial stress" for vulnerable consumers.

The money it earns from late fees surged 365 per cent to $28.4 million, according to its latest annual report, released on Thursday.

It is significantly higher than its $6 million worth of late fees from the 2016-17 financial year.

Afterpay reported that it earned 24.4 per cent of its income from late fees — and 75.6 per cent from merchant fees (charging retailers commission for each sale).

"Our financial counsellors report that we are receiving increasing numbers of calls from people with buy-now-pay-later debts, including Afterpay," said Katherine Temple, the Consumer Action Law Centre's senior policy officer.

"Most people calling us for help who have Afterpay debts are juggling numerous other debts, such as credit cards, payday loans and utility bills."

ASIC's regulatory loophole

Also released on Thursday was a report by the corporate regulator that recommended law reform in the "buy now, pay later" sector, which also includes companies like Zip Money and Zip Pay.

In the report, Australian Securities and Investments Commission (ASIC) noted the Government's plan to broaden credit regulations so that it covers the buy now, pay later sector.

"Despite being within ASIC's regulatory responsibility, many providers of buy now, pay later arrangements are likely to fall outside the scope of the product intervention power," ASIC wrote.

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It explained that buy now, pay later schemes are not currently covered by the National Credit Code and is, therefore, unregulated.

"Some providers extends funds without charging fees or interest and as such do not meet the definition of 'credit' under the code," ASIC wrote.

Afterpay is likely to fall into that category given it is a free service for its users who pay on time.

In addition, the company charges a flat fee, instead of an interest rate, for customers who miss their payments.

The company imposes a $10 penalty for shoppers who miss the first fortnight repayment, then a further $7 late fee if that instalment remains outstanding after one week.

Customer who miss all four instalments are subject to a total late fee of $68 per transaction.

The Consumer Action Law Centre has doubts that Afterpay conducts thorough responsible lending checks as it approves customers' purchases "instantly" — a promise which features prominently on its promotional materials.

Ms Temple said: "Afterpay doesn't consider itself subject to our national credit laws because it doesn't technically 'charge' consumers, although late fees are applied."

"This means they are not required to comply with responsible lending obligations or other important consumer protections that apply to other credit providers."

ASIC also said "vulnerable" consumers using these pay arrangements face several risks.

This may include credit providers carrying out "limited inquiries of consumers' financial situations prior to providing credit", and some providers funding high purchase costs (up to $30,000) over long repayment periods.

Sixfold surge in fortunes

Afterpay's fortunes have grown exponentially in the past year, with its market value surging sixfold from $670 million to $4 billion.

In its financial results, released on Thursday, Afterpay revealed its progress towards profit — its net loss narrowed slightly, by 6 per cent, to $9 million.

This was driven by a 397 per cent jump in revenue to $113.9 million.

The company said it was due to a "significant increase" in the number of retailers signing up to its payment platform and customers who have adopted it as a "payment method and budget tool".

There was also an improvement in bad debts, with "net transaction losses" worth 0.4 per cent of underlying sales (down from 0.6 per cent last year).

Afterpay believes it is because customers are "continuing to use the platform responsibly" — particularly as 95 per cent of payments it received "did not incur a late fee".

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Shopaholics and financial stress

Financial product comparison website Mozo conducted a survey of 1,000 customers across the nation who use Afterpay and found the results "surprising".

"As the market leaders of 'buy now, pay later' we were interested to know more about the spending behaviours of users on this platform," Mozo director Kirsty Lamont said.

The customers from the survey said they were:

In "financial stress" due to their Afterpay spending habits (25pc);

In "financial stress" due to their Afterpay spending habits (25pc); Inclined to spend more using Afterpay, compared to a debit or credit card (45pc);

Inclined to spend more using Afterpay, compared to a debit or credit card (45pc); Unaware that use of Afterpay could potentially affect their credit score (33pc);

Unaware that use of Afterpay could potentially affect their credit score (33pc); Hiding their Afterpay spending from partners (30pc).

About 650 of those customers believed small digestible payments were influencing them to make purchases they would not normally make.

An estimated quarter of all online apparel retail is conducted using Afterpay. ( Screenshot )

"Afterpay is highly appealing to shoppers who don't have the money on hand to make a purchase in one payment, and therein lies the risk," Ms Lamont said.

"Small manageable payments are snowballing for some users, resulting in late payment fees, potentially poor credit rating and spending beyond one's means."

One Afterpay customer, Chelsea, 30, told the ABC she is a frequent user of the platform, and has a "love-hate relationship" with it.

The unemployed psychology student said she spends more than she earns, enjoys getting the clothes she wants straight away, but knows her "future self is paying for it".

Although she is not working, Chelsea is able to pay from her savings, boosted by a sizeable redundancy payment when she left her corporate job last year.

"I haven't missed a payment because Afterpay is linked to my credit card, but this has left me in a worse financial situation," she said.

Afterpay's intense disagreement

Afterpay strongly disputed the findings of that survey.

"The clear factual errors … and limited scope in this survey call into question its credibility and its accuracy," Afterpay's spokesperson said.

"Customers cannot continue to use the system if they are overdue on any payment.

"94 per cent of Afterpay transactions are from returning customers, which means they do not have any overdue amounts.

"Afterpay purchases do not affect credit ratings as we do not report to the credit-rating agencies."

But according to its terms of service, Afterpay has the right to report customers to credit-reporting bodies, under clause 6.2(e):

"You authorise Afterpay … to disclose to third parties … any information in relation to you or your Afterpay Account. In addition, you acknowledge that Afterpay reserves the right to report any negative activity on your Afterpay Account (including late payments, missed payments, defaults or chargebacks) to credit-reporting agencies."

Expanding abroad

Afterpay will expand into the United Kingdom in six months, by taking over British company ClearPay, which offers a similar product to Afterpay.

Afterpay offers loans for products online and in traditional bricks and mortar retailers. ( Supplied: David Chau )

ClearPay offers shoppers "interest-free credit" through a "buy now" and "pay in three" instalments arrangement, in what is essentially modern lay-by.

Afterpay's proposition, in comparison is "buy now, pay later", in four fortnightly instalments, but stresses it does not offer "loans" or "credits" — and therefore is not bound by responsible lending laws.

The company will pay for its British acquisition by issuing 1 million new shares, and also funding it through a $108 million capital raising.

This follows its expansion into the United States three months ago, with Afterpay signing up 800 US retailers and 150,000 customers.

Afterpay has come a long way since February, when it released its half-yearly results. At the time, it had signed up 6,000 retailers and had 1.5 million active customers.

It has since skyrocketed to 17,700 retailers and 2.3 million customers.