Afterpay executives say they were ‘absolutely distressed’ by a retailer’s advertising campaign that encouraged ‘broke’ consumers to use their service.

The ASX-listed buy-now, pay-later provider says it threatened to withdraw service from the retailer when it became aware of the advert last year, and would have severed ties had there been any repeat.

The ad in question encouraged ‘Broke AF’ consumers to use Afterpay to ‘treat themselves’.

Appearing before MPs as part of an inquiry into credit and financial services targeted at those at risk of financial hardship, Afterpay executive chairman Anthony Eisen said the company had beefed up monitoring to ensure retailers complied with its efforts to ensure struggling consumers do not take on more debt.

Mr Eisen said the ad was unacceptable and contrary to the values of a company that derives 80 per cent of its income from retailers rather than consumers.

‘We were absolutely distressed when we first made aware of that campaign,’ Mr Eisen said on Tuesday.

‘There is nothing whatsoever associated with that campaign that was supported, endorsed or acquiesced (to) by Afterpay in any way.’

The cost to consumers in late fees for Afterpay – a modern form of lay-by – is capped at $68 or 25 per cent of the cost of the goods or service, whichever is smaller.

Afterpay says late fees are not designed to generate profit and are a genuine estimate of losses incurred as a result of late payments.

The company’s submission to the inquiry said it ‘promotes responsible spending and seeks to offer a credible alternative to credit products.’

It has largely been used for consumer goods, but Afterpay acknowledges it is now being used for other services such as dentistry.

‘We know that millennials have one of the lowest participation rates in private health and general dental is not covered by Medicare,’ Afterpay’s submission said.

‘Our first partnership is with Primary Dental and it has proven extremely popular, with thousands of patients opting to pay via the new method since launch.’

Rival Zip Co, which also appeared before MPs, said it was created due to consumers’ unhappiness over the high cost of credit cards and endeavoured to act responsibly.

The company does not allow customers to use the service to pay off other debt.

‘From day one, we have tried to be one of the most ethical players in our segment,’ chief executive Larry Diamond said.