To Pay or Afterpay, That is the Question

September 21, 2020 at 9:18 am 2 comments

When it comes to financial innovation, the land down under is the equivalent of a financial services petri dish, especially when it comes to consumer credit. So humor me this morning as I delve into one of the hottest financial services stocks, Afterpay. 

The company started in 2017, and it is now beginning to get a foothold in the American market, with potential competitors, including Visa, which is soon to follow suit. What intrigues me so much is that Afterpay has brought fintech to a buy-now, pay-later consumer product, that avoids the grasp of the Truth in Lending Act (TILA). I’m curious how much longer it will be able to pull off this feat. 

This is the basic idea of how Afterpay works. On the retail side, it enters into agreements whereby it pays the full amount due, while the consumer commits to make payments in no more than four installments. The retailers pay a fee to Afterpay in return for the knowledge that the transaction is complete. Eligible consumers agree to repay Afterpay in increments. Not all consumers are eligible to enter into these agreements, and Afterpay has the right to deny the purchase request. 

The catch from a regulatory standpoint is that this is not considered credit under TILA because repayments must be made in four or fewer installments. TILA only kicks in on the fifth installment. Isn’t that clever?

According to the Financial Times, the stock is taking off. Analysts have predicted that the model wouldn’t survive the severe downturn in retail shopping caused by COVID. What they didn’t foresee was that the system works just as well, if not better, for online shopping. It appeals to millennials who want to avoid taking out credit cards, but could use short-term credit options. 

But one business’s financial innovation is another regulator’s gaping loophole. This article in Law360 (subscription required) highlights regulatory action which California is already seeking to take against Afterpay, alleging that it has to be properly licensed as a lender as a matter of state law. Pure speculation on my part, but you can probably bet New York State is looking into doing a similar analysis. 

Besides, the company can only grow as big as the number of retailers willing to participate. Time will tell how many of them decide it is in their financial interest to partner with Afterpay.

Entry filed under: Compliance, Technology. Tags: , , .

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Authored By:

Henry Meier, Esq., Senior Vice President, General Counsel, New York Credit Union Association.

The views Henry expresses are Henry’s alone and do not necessarily reflect the views of the Association. In addition, although Henry strives to give his readers useful and accurate information on a broad range of subjects, many of which involve legal disputes, his views are not a substitute for legal advise from retained counsel.

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