Announced on Wednesday and scheduled for launch next month, Afterpay's collaboration with Westpac retroactively divides a payment into four instalments, based off a transaction in the past 72 hours.
The Retro feature effectively means up to $200 is credited to customers' accounts.
Users must be a 'Money by Afterpay' customer, and while there are no extra fees to use the product, the usual Afterpay late fees apply.
Afterpay's vice president Lee Hatton said the new feature gives consumers an alternative to high-interest wage advance or 'pay on demand' apps.
However, Gerard Brody, CEO of Consumer Action Law Centre, told Savings.com.au the new feature is "just another credit arrangement".
"This ... underscores why we need the national credit laws to apply to buy-now-pay-later, including responsible lending laws," Mr Brody said.
The collaboration with Westpac on the new Money by Afterpay app - where the 'Retro' feature sits - effectively white-labels the major bank's transaction account.
Payments expert Bradford Kelly told Savings.com.au he was surprised Westpac would collaborate on such a move.
"Where is the regulator? Asleep at the wheel. If this doesn’t get the attention of regulators then nothing will," Mr Kelly said.
"I'm shocked that any bank, let alone Westpac, is allowing itself to be associated with such an egregious product.
"Customers who need $200 - and let's face it, this isn't about budgeting - are at the end of road when it comes to credit.
"Why go for the bottom of the barrel, when the gutter is just down there?"
An Afterpay spokesperson told Savings.com.au the intended use of Retro is for budgeting and not for loans.
"Retro is part of a customer's overall Afterpay BNPL limit, not something additional," they said.
"Importantly, Retro is available for purchases that customers have already made with their Money by Afterpay debit card.
"Just like Afterpay, Retro is tied to purchases and is not a cash loan.
"Retro does not cost anything for Money by Afterpay customers, provided they pay on time."
Why is this happening?
Partner at law firm Colin Biggers & Paisley, Toby Blyth, told Savings.com.au the alliance between Afterpay and Westpac is for marketing purposes, and for ease of scale.
"This is a marketing alliance with Westpac to offer a new product to Westpac's own customer base, and to scale Afterpay, given market concern about Afterpay's profits and viability in the big pond of the international market," Mr Blyth said.
However, Mr Blyth also questioned the direct monetary benefit for Afterpay.
"It cannot charge the merchant, which has already paid merchant fees on the original debit card transaction that is in effect being refinanced," he said.
"It may be that Westpac pays what is in effect an introducer's fee to Afterpay, and recoups the costs via late fees.
"Banks have deep experience in the loss leader effect of '55 days interest free' and similar."
Former Citi and Diners Club executive, Grant Halverson, also explained the reasons for the move.
"BNPL is clearly lending or else why does Afterpay have bad debts or collection costs of $200 million - the largest single expense at 24% of revenues and over 1% of sales?" Mr Halverson told Savings.com.au.
"Post-sale BNPL has been around for years and is not new - it's very popular in Asia, Latin America and Africa."
Mr Kelly was frank in his assessment of the Retro move.
"They have run out of customer growth in Australia and now need to go even deeper into the risky and frisky end of the credit market," he said.
Just last week, United Kingdom BNPL provider Curve launched 'Flex' - a similar premise to Retro - which retroactively applies BNPL instalments to transactions.
However, Curve goes a step further and allows customers to 'convert' transactions made up to a year ago into "free" or "low interest" loans, according to its CEO Shachar Bialick.
"Curve Flex is almost certainly the most flexible credit solution in the market," Mr Bialick said.
"Being able to go back in time and pay later is going to forever change how UK customers think about managing their personal finances and cashflow."
Since September 2020, Flex beta customers have converted approximately 7,000 transactions into what Curve openly calls "instalment loans", to the value of £1 million (AUD $1.89 million).
Is a credit crackdown coming?
BNPL is currently not subject to the National Consumer Credit Protection Act of 2009 (NCCP) because the NCCP does not apply to short-term credit of less than 62 days.
A Senate Inquiry in September 2020 also concluded BNPL providers are fine to 'self regulate'.
However, that could all change next month as regulators review the credit framework, according to Mr Halverson.
"ASIC has new Design and Distribution Obligation [DDO] powers in October - will they use them, who knows?" he said.
"They most definitely should as it's not just BNPL - there is now a proliferation of 'copy cats' who are taking this loophole to extremes.
"The net result is more young consumers getting into financial trouble."
The DDO powers gives ASIC - the Australian Securities and Investments Commission - power to enforce new arrangements including stop orders and exemption powers.
The new powers could extend to any financial product requiring a product disclosure statement, as well as credit products covered under NCCP, and short-term contracts not covered under NCCP.
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