How Square’s Purchase of Afterpay May Impact Your CU

August 3, 2021 at 10:34 am Leave a comment

The announcement that Square will purchase Afterpay for a mere $29 B is more than just another business story. Look under the hood and the transaction shows: how the payment space is fundamentally changing; the way transactions are executed; raises questions about the continued utility of the existing regulatory framework; and demonstrates yet again that financial institutions, which do nothing more than hold money and keep consumer’s income safe, are becoming increasingly minor cogs in consumer financial transactions.

First, what is Afterpay and what does it do? As I explained in this blog, Afterpay is an online payment platform started in Australia less than a decade ago which specializes in facilitating buy-now, pay-later transactions. Merchants agree to pay a fee to facilitate in-store purchases; consumers agree to repay the purchase with a limited number of payments; and Afterpay agrees to purchase the sales installment contract.

What’s so clever about this arrangement? Merchants get their money free and clear even if the fee they pay seems an awful lot like an interchange fee. What’s in it for the consumer? Apparently, Millennials really do hate debt. Good for them. The installment plans give them reasonable payment flexibility without using a credit card. Afterpay avoids the federal disclosure requirements mandated by the Truth In Lending Act (TILA) by limiting payment to four installments. A fifth installment would trigger TILA. The model also gives Afterpay a huge volume of retail installment contracts to buy and sell. You can easily imagine these things packaged into securities.

Square is a more traditional peer-to-peer payment platform started way back in the teens of this century. It specializes in giving merchants easy access to payment platforms and of course, getting a piece of each transaction.

The amazing thing about all these developments is how little these entities are regulated. Afterpay did enter into a consent decree with California in which it agreed to comply with state level license requirements for retail lending. But one states licensing requirements do not level the playing field.

One more thought.  Recently the Biden Administration announced it was going to take a more aggressive view of mergers under our antitrust laws. In reviewing this proposed purchase, I’m assuming the Justice Department will be asking itself whether the real purpose of this transaction by Square is to buy up a potential competitor in a payment space it ultimately hopes to monopolize, as opposed to helping consumers by bringing resources to a company whose unique payment model expands choices for consumers.  Call me cynical, but I have my doubts.

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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