Consumer advocates have sounded a warning over the growth of the buy-now pay-later scheme Afterpay, saying people are being allowed to overcommit because the company is not obliged to check whether users can actually afford to make repayments.

Low-cost carrier Jetstar last week announced a buy-now, pay-later option for airfares costing up to $1,000 that would allow customers to pay off their flights in small installments. In doing so, it became the latest firm to partner with Afterpay, a digital payment platform that listed on the Australian Stock Exchange last year and now has more than one million customers.

Afterpay operates similarly to a lay-by system – you purchase a product and pay it off in four instalments, paid fortnightly.

The difference is that, because Afterpay takes on the risk of default from the supplier, the purchaser receives the product upfront. That same detail also makes it more popular with merchants, and it now has more than 7,000 retailers, including brands such as General Pants Co, The Iconic and Optus, who pay Afterpay a fee – reportedly about 4% of the purchase price – for each sale.

The company was founded in 2014 by Nick Molnar, a Sydney-based 27-year-old who previously founded an online jewellery retailer while at university.

Announcing the partnership with Jetstar in a statement to the ASX, Molnar said the arrangement would give it access to a market where millennials are increasingly spending their disposable income.



Afterpay views millennials as its target market, but also sees itself as an expression of a kind of millennial value system.

In its end-of-year financial presentation Afterpay said it was “aligned with core millennial values and lifestyle preferences”, and Molnar, who’s based in Sydney, speaks in almost evangelical terms about “millennial legacy”.

Earlier this month he spoke at a Tedx Sydney event and outlined what he called “millemmas” – the dilemmas facing millennials - including the desire for instant gratification, which Afterpay caters to.

“We live for our five-star Uber rating and 50 Instagram likes [but] I believe this means we are incredibly instinctive, intuitive, decisive and trust our gut,” Molnar said.

“We make quick decisions and the world provides us with immediate feedback of whether or not the decision was the right one.”



But by allowing young consumers – purchasers need to confirm that they’re 18 or older before downloading the app – to trust their gut and make impulsive purchases, is the company inculcating a new generation into debt?

The South Australian Council of Social Services chief executive, Ross Womersley, thinks so.

He said Afterpay was “unregulated” and “another way of encouraging us to commit to money we don’t actually have in our pockets”.

“That’s fine if we’re in a situation where we have the income flow to meet whatever payments were obliged to ... but it’s easy to picture a situation where someone loses track of their commitments and over-burdens themselves,” he said.

But, as with other so-called “fintech” companies that offer similar services, such as Openpay and Zipmoney, the company says it is not a credit facility because it doesn’t charge interest.

Instead, Afterpay users are charged a late payment fee of $10 and a further late fee of $7 if the payment is not made within seven days.

Users are also unable to continue making purchases if they have outstanding debts.

“The vast majority of millennials don’t want to be on credit,” Afterpay executive director, David Hancock, told Guardian Australia.

“Approaching 90% of people using Afterpay use a debit card because, our research indicates, they don’t want to be in the never-never of credit debt.”

But Afterpay’s terms of service still allow it to run credit checks, and it reserves the right to “report any negative activity on your Afterpay account (including late payments, missed payments, defaults or charge backs) to credit reporting agencies”.

Financial rights firms also wonder whether the no-interest model allows the firm to avoid consumer protections in the National Consumer Credit Protections Act, which which covers the entry into and enforcement of credit contracts.

Katherine Temple, a senior policy officer at the Consumer Action Law Centre in Melbourne, said buy now, pay later companies could potentially avoid the act either through an exemption for short-term credit of 62 days or less or because “technically they’re not making a charge for credit provided”.

“We are concerned about these businesses, which are becoming more and more popular, not being regulated by national laws because it means they’re not obliged to check whether you can actually afford to make repayments,” she said.

“From our point of view it’s an emerging issue and something we expect to see more problems with down the line.”

Hancock admits its activity isn’t covered by the act, but says it has hardship policies for people facing financial stress.

“We’re very much centred in responsible business, our loss ratios are very low [and] unlike other payment methods, if you’re behind you’re cannot continue to use our service until bring your account into good order,” he said.

“We have always maintained that late fees are around cost recovery ... we don’t see them as a major source of income, in fact over 80% of our income comes from our merchants.”

And consumer advocacy group Choice says Afterpay is preferable to the payday loan industry because there is no interest charged for using their products.

“This means you could pay off a $100 pair of jeans over eight weeks without paying anything extra,” a spokeswoman said.

In any case business is booming, and after the entry into the airfare market, Afterpay is also eyeing possible expansion into health, ticketing and “experiences”.

“We see ourselves, on the customer side, as a budgeting service to buy life’s little luxuries,” Hancock said.

“For businesses, we’re there to aid sale conversation.”