Afterpay faces US Class Action

A California State Class Action accuses Afterpay of deceptive conduct and rapacious late fees in targetting young and poor consumers.

The case accuses Afterpay of marketing its service as interest free which is decepetive.

Will other class actions in other states follow?

California is a key market and given the links with social influencers - Kardashian's etc. will this cause them some issues?

The case was filed 27th May, yet Afterpay an ASX listed company in Australia has not made any public disclosures about this - why?

Afterpay is reportedly in the middle of a proposed US share listing - this will not stop this but may temper reaction?

Afterpay ran foul of California regulators in 2019, agreeing a settlement for operating without a license in 2020.

Affirm USA a competitor listed earlier this year and after reaching a peak of US$140 in early February is now at US$59 with no legal actions pending.

Afterpay should also be worried about this type of class action leading to full US regulation?

BNPL Service Afterpay Faces Class Action

FINTECH BUSINESS WEEKLY - By Jason Mikula 

jason@fintechbusinessweekly.com

Last week, a proposed class action against buy now, pay later service Afterpay was filed in the Northern District of California.

The crux of the case’s argument is that Afterpay’s marketing as interest / fee-free is deceptive, as it can cause users to incur insufficient funds (NSF) and overdraft fees, if a repayment is attempted when a user’s balance is too low to cover the charge.

 Screencap via Afterpay.com

The case further argues that Afterpay targets lower income consumers living paycheck to paycheck (emphasis added):

“Afterpay specifically targets young and poor consumers and those struggling to make ends meet on a week-to-week basis. This group is its core constituency.

To that group, Afterpay purports to offer a solution to cash-strapped consumers: Afterpay prominently markets itself as a service that allows users to pay for purchases at a later date, with no interest, no fees and no hassle. These representations are false. In fact, there are huge, undisclosed fees and interest associated with using the service.”

And that, because of the user segment Afterpay is targeting, it knew or should have known that its users could incur overdrafts (emphasis added):

“This is the same group of consumers that Afterpay targets with its marketing: consumers living paycheck to paycheck. As a result, Afterpay knew or should have know that such users were at extreme risk of overdraft fees when using the Afterpay service.”

I’ve argued previously that some aspects and use cases of BNPL, particularly of the ‘split pay’ variety, are reminiscent of payday loans:

·       lack of traditional underwriting or ability to pay checks

·       not reporting outstanding BNPL balances to the credit bureaus

·       the short repayment timeframe.

Just because a service is “free” doesn’t mean it isn’t debt and that consumers can’t get into trouble, as the claims in this case illustrate.

The “debt trap” argument commonly deployed against payday loans could apply equally well to BNPL, where users could find themselves perpetually needing to split everyday expenses like groceries or clothing into multiple payments because they don’t have enough cash in their account.

Undoubtedly the lack of direct fees associated with BNPL is preferable to traditional payday loans, but, as this suit shows, users can end up incurring substantial fees with their bank or other creditors from overdrafts or late payments.

Lack of visibility across BNPL providers poses a particular challenge in ensuring responsible underwriting and usage. There’s nothing to stop users from leveraging multiple BNPL providers concurrently, potentially overextending themselves — a problem that also exists in the payday market.

Some states have addressed that problem in payday loan usage by mandating use of a centralized database, Veritec, to ensure borrowers aren’t exceeding state caps on the number or dollar value of loans. A similar system could benefit BNPL providers and their users by ensuring users don’t take on an unmanageable debt load.

US Class action won’t fly, Afterpay insists

THE AUSTRALIAN JOYCE MOULLAKIS 9th June

Afterpay is shrugging off a US class action against the buy now pay later by labelling it “without merit”, as concerns rise about whether the sector will start to get caught in regulatory nets.

The class action brought by two law firms – on behalf of Springfield, Missouri based Brooke Miller and 100 users of buy now pay later service – was submitted to the California Northern District Court.

An initial case management conference is schedules for September, with parties accusing Afterpay of “misrepresentation and omissions” in marketing materials about operation of the instalment service, and unfairly targeting “young and poor consumers and those struggling to make ends meet”.

“Afterpay’s marketing never warns consumers of the extreme and crushing NSF (non-sufficient funds) and overdraft fee risk of using the service,” the legal documents allege.

An Afterpay spokeswomen said while the company had not been served with a class action claim, based on public documents it believed the complaint was “without merit”.

“If served, the claim will be vigorously defending. The allegations relate to fees charged by a consumer’s banking institution – not Afterpay” she added.

“Our terms and conditions state that individuals must have sufficient funds in their account to meet their repayments. We also remind our customers regularly to ensure they have sufficient funds”.

The spokeswomen also noted if an Afterpay customer missed a repayment, their account was suspended until the payment was made.

But the legal action comes at a crucial time for Afterpay in North America, as it considers listing on a US exchange to reflect its growth ambitions in that market.

Last year, Afterpay was forced to refund late fees paid by its customers in California, when the state’s financial regulator found them to be illegal.

McLean Roche Consulting’s Grant Halverson, a former Citibank, and Diners Club executive said Afterpay’s decision not to draw on customer credit scores left if vulnerable to legal and regulatory action.

“This (class action) is the early shot leading to regulation.” He added, noting the importance of Afterpay’s US growth plans to its overall strategy.

In Britain, it was announced in February that the buy now pay later sector would be regulated by the Financial Conduct Authority.

Jefferies analysts conducted a deep dive into the buy now pay later sector late last month and said while there was scope for growth, regulatory risks should not be underestimated.

“In Australia, design and distribution obligations will apply to most products that ASIC regulates in October 2021, meaning ASIC will have a product intervention power including BNPL, if it is found to be detrimental” they said “To be clear, we believe that Afterpay and Zip adhere to the spirit of responsible lending, but other small BNPL players may give the industry a bad name and Afterpay and Zip may get caught in the regulatory trap.”

Jefferies noted positive growth prospects given low rates of Australiana and US e-commerce penetration, but highlighted the market had attracted a spate of new entrants including PayPal and Commonwealth Bank.

The analysts lowered their expected revenue margin for Afterpay and Zip and cut both price targets by 20 per cent. Jefferies still has a “buy” rating on Afterpay and the price target has been reduced to $124.83. The stock closed at $97.20 on Tuesday.

Macquarie analysts this month pointed out Afterpay continues to overwhelmingly dominate local app downloads of buy now pay later, giving it 66 per cent market share in Australia.

In the US, Afterpay remains the top player in the BNPL app store by the number, but the company has slower momentum than its peers. 

Australia's Afterpay settles with California regulator for loans issued without license

 Reuters 17th March 2020

Australia's buy-now-pay-later firm Afterpay Ltd will refund late fees paid by customers in California for loans, which were deemed "illegal" by the U.S. state's financial regulator, the two sides said as part of a settlement.

The company will pay A$1.5 million ($916,350), of which $905,000 will go to about 640,000 consumers in California who paid late fees and the rest will be administrative fees.

The settlement is for loans issued before Afterpay had a California financing law license. It was granted a license in November last year.

The increasingly popular buy-now-pay-later space has been facing increased regulatory scrutiny, and Afterpay, considered by many as the sector’s bellwether, has faced the brunt of it back home in Australia too.

Shares plunged 10.2% in early trade, only to recover to be down 4.5% in a little over one hour of trading. The broader index .AXJO was in positive territory after closing sharply lower on Monday.

Earlier this year, California's financial regulator, the Department of Business Oversight (DBO), had also rapped Minneapolis-based and Australia-listed Sezzle Inc SZL.AX for giving out credit without a license.

“While Afterpay does not believe such an arrangement required a license from the DBO or was illegal, Afterpay has agreed to conduct its operations under the DBO license as a part of this settlement,” a company spokeswoman said in an email to Reuters.

Buy-now-pay-later firms have gained traction, mainly with millennials, by giving an option to buy things through interest-free installments and helping them sidestep tougher rules related to taking a credit card or loan.