Consumer advocates warn of risks in deferred payment schemes.
Consumer advocates warn of risks in deferred payment schemes.
Shoppers are being offered more ways than ever to get the latest clothes, technology and trendy homewares without having to pay the full cost up front.
But consumer advocates are warning buyers to be wary about getting into debt without being aware of the consequences if they cannot pay.
In the past six months New Zealand has seen the launch of four new buy-now, pay-later services, including Australian firm Afterpay, which began its offering via Trade Me this week.
The companies offer deferred payment schemes that allow consumers to pay for purchases over six weeks. They do not charge a set-up fee or interest, but do charge default fees if a buyer fails to make payments on time.
Retailers who sign up to use the system pay a percentage of the sale to the payment company.
John O'Sullivan, founder and a shareholder in PartPay, which launched in New Zealand in May, said the service and others like it were turning the traditional buying model on its head.
"The idea is to make purchasing frictionless for buyers and then spread the payments to make it more affordable."
PartPay was completely aligned with the consumer, he said, because it did not charge interest or a set-up fee.
Traditionally, financing has meant the consumer pays a set-up fee and interest. Instead, PartPay is focused on ensuring the consumer pays instalments on time.
The company emails consumers three days before the payment is due and sends text messages. If a payment does not go through the first time, it will send a text to the consumer and try again before adding a late payment charge of $8 if a person fails to make the payment.
The company undertakes credit and identification checks when consumers apply.
The strength of a person's credit history determines how much money the company will part with.
Approval can take a mere 15 seconds. In fact, O'Sullivan said it took longer for a person to type in their information.
PartPay pays the retailer and the goods are passed on to the consumer.
The company takes on the credit risk if the consumer does not pay all of the money, but defaults were typically a tiny fraction of a percentage, O'Sullivan said.
The typical transaction was $100 to $300, but people could buy as much as $1000 worth of goods with PartPay.
"People do want a lifestyle product that suits them," said O'Sullivan.
In the past, that might have been lay-by or credit card, he said.
"The reason this resonates ... it's a smarter way to use your own money."
Younger buyers are particularly in the companies' sights.
Chris Lamers, New Zealand chief executive of Flexigroup, which launched Oxipay in this country last month, said millennials wanted to manage their money without racking up long-term debt.
"We have launched Oxipay in response to demand from younger consumers. They want to be able to purchase the goods they want now, while managing their money without long-term debt.
"This group has access to more information about products than ever before and are very savvy about their purchasing decisions."
Those in the under-35 age group had a very different attitude to money than their parents, Lamers said, pointing to Facebook research which showed millennials were diligent in paying down debt, careful with credit cards and keen to accumulate savings.
"Having seen family and older friends hit by debt during the global financial crisis, 46 per cent of this group say financial success means being debt free."
However, the concept has already run afoul of Consumer New Zealand, over comparisons between the new payment systems and lay-by.
Consumer NZ chief executive Sue Chetwin.
Consumer NZ chief executive Sue Chetwin said these kinds of payment methods were not like lay-by, which was covered under the Fair Trading Act.
In a lay-by situation, if buyers changed their minds half way through paying off an item, they could ask for their money back.
Chetwin, who has complained to the Commerce Commission, said while the new companies provided convenience to consumers, that could come with a cost.
"They are really aimed at people who can't afford to buy something right now.
"While it might look convenient, it's a way to get yourself into debt."
She also had concerns that having a third party involved could give retailers a licence to delay refunds and make it harder for consumers to know who they should deal with.
"From a consumer perspective it should be really simple."
Chetwin urged buyers to consider all the terms of the agreement before entering into it.
Tim Barnett, chief executive of the Financial Capability Trust, said his concern was that delayed payment was a way for people to avoid paying attention to the full cost of an item.
Barnett, whose trust co-ordinates New Zealand's budgeting advice services, said there was always a risk when people entered into an agreement and could not make the payments.
Default fees of $8 or $10 might seem small, but they would add a big percentage cost to an item which was $50 to start with, he said.
"Companies are always looking for a way to get into a market and make a profit.
"They are well aware of human foibles, and people's desire for goods often exceeds people's ability to afford them."
That was a reality which its budget advisers worked with all the time, said Barnett.
Kelly McFadzien, a partner at Chapman Tripp specialising in consumer law, said the risk to consumers was that their credit history could be affected if they did not pay on time.
Those who sought a refund might also find it took longer to get the money back if they were still paying it off, compared to just walking into a shop and asking for a refund on the spot, McFadzien said.
"It is not as immediate and that might be a problem for some people."
However, she said it filled a gap where people might not have access to a credit card.
Flexigroup's Lamers said for those without a credit card, this could be a way to build up a positive credit history.
"I had a credit history [when I was younger] because I had a credit card. A lot of people don't have credit history - this is one way of building it up."
The company would work with people who got into hardship, to pay back the money.
"We manage credit across [a] whole range of products," he said. "We have an industry-leading default rate."
Retailers appear to be climbing on board with the idea.
Trade Me Marketplace's Rick Davies said 1300 sellers had signed up to offer Afterpay.
Trade Me expected the payment option to be used more by sellers of new rather than second-hand goods.
But the payment option comes with a cost for sellers. They must pay 5.95 per cent of the sale to Afterpay on top of the success fee they pay to Trade Me. That is higher than the 1.95 per cent fee they pay for selling something purchased by credit or debit card.
Davies said the higher fee was because Afterpay was providing a risk-free instalment system. Sellers got their money up front while Afterpay did the chasing if the payments were not made on time.
AfterPay had more than a million customers in Australia.
