One in six customers who use payment methods like Afterpay and Zip Pay are in financial trouble — whether it is being overdrawn, delaying bill payments or borrowing more money to pay off their debt.

Key points: Afterpay's income from late fees surged 365 per cent to $28.4 million

Afterpay's income from late fees surged 365 per cent to $28.4 million Buy now, pay later customers increased from 400,000 to 2 million between the 2015/16 and 2017/18 financial years

Buy now, pay later customers increased from 400,000 to 2 million between the 2015/16 and 2017/18 financial years Draft laws propose new powers for ASIC to intervene if it believes there is a "significant consumer detriment"

The customers are also typically "young", with 60 per cent of them aged between 18 and 34.

Those were the key findings by the Australian Securities and Investments Commission (ASIC) in its first review of the rapidly growing "buy now, pay later" sector.

Buy now, pay later schemes are seen by many as "modern day lay-by".

The key difference is that customers can take their goods home immediately, without first needing to pay off every instalment.

Some providers, like Afterpay, offer fixed repayment terms of up to 56 days for amounts up to $2,000.

Other companies like Zip Co — which operates Zip Pay and Zip Money— offer customers credit "of every size, from $1 to $30,000", according to its website.

The corporate watchdog also reviewed the operations of Certegy Ezi-Pay, Oxipay, BrightePay and Openpay for its report.

Tougher laws ahead

ASIC's report also found that Australian customers, collectively, owe $903 million in buy now, pay later debts.

It also found that there was a 400 per cent jump in customers who had used these schemes — from 400,000 to 2 million — between the 2015/16 and 2017/18 financial years.

Podcast The Signal Good deal or debt trap? Australians are flocking to Afterpay to shop online, but the buy now, pay later scheme doesn't have to check if they can afford it. Is it time for a crackdown? About

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Their surge in popularity is also evident in the number of transactions per month — from 50,000 (in April 2016) to 1.9 million (in June 2018).

The regulator is investigating businesses in this sector because, unlike banks, they are not currently required to lend responsibly or perform credit checks under the National Credit Act.

It considers these arrangements to be "credit facilities" — therefore giving it the power to act if a buy now, pay later company engages in misleading or unconscionable conduct.

However, ASIC was also concerned that use of these services tends to result in customers buying more expensive items than they would otherwise, and spending beyond their means.

"Although our review found many consumers enjoy using buy now, pay later arrangements and plan to continue using them, there are some potential risks for consumers in using these products," ASIC commissioner Danielle Press said.

"We found that buy now, pay later arrangements can cause some consumers to become financially overcommitted and liable to paying late fees."

Afterpay revealed, in its latest annual report, its income from late fees surged 365 per cent to $28.4 million.

Some cosmetic surgery clinics have also been encouraging young women to sign up to "pout now, pay later" schemes through Zip Pay and other similar providers.

Last month, the Federal Government released draft laws which would introduce "product-intervention powers" for ASIC.

It is essentially a new power for ASIC to intervene "proactively" if it believes there is a risk of "significant consumer detriment" arising out of a financial or credit service.

These new powers have not yet been enacted into law, and are expected to put further pressure on buy now, pay later companies.