Australia to regulate buy now, pay later sector with credit laws
AUSTRALIA’S government moved to regulate buy now, pay later (BNPL) finance firms under credit laws, drawing the line on a months-long process aimed at tightening requirements on the maturing industry.
Firms will need to adhere to “responsible lending” obligations and hold Australian credit licences, said Stephen Jones, the country’s minister for financial services. They will also face a range of minimum standards on conduct and products.
BNPL has “provided a valuable source of competitive pressure on traditional credit products, such as credit cards or payday loans”, he said in a speech on Monday (May 22). “But with those opportunities have come new and growing dangers to consumers, which up until now have been largely unregulated and unchecked.”
BNPL companies typically offer on-the-spot, interest-free, short-term loans with minimal credit checks that spread payments over weeks or months. Such loans are largely used by cash-strapped people taking debt, sometimes more than they can afford.
The absence of interest charges has so far exempted BNPL providers from consumer credit regulation. The sector surged earlier in the Covid-19 pandemic, amid an online shopping frenzy spurred by stimulus payments and ultra-low interest rates. But it has struggled in recent months amid soaring interest rates and the threat of stricter regulation.
“BNPL looks like credit, it acts like credit, it carries the risks of credit,” Jones said. “Our plan prevents lending to those who cannot afford it, without stopping safe, prudent BNPL use.”
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Australia is home to about a dozen listed BNPL providers. Data shows that the country had about seven million active BNPL accounts that resulted in A$16 billion (S$14.3 billion) of transactions in 2021-22.
Retail industry figures show that Australians spent A$63.8 billion shopping online in 2022, with 26 per cent of Australians saying they used BNPL to pay for purchases.
BNPL companies make most of their money charging a percentage of sales revenue to merchants, in exchange for directing shoppers to them. They charge borrowers late fees, but say they encourage on-time repayment with the promise of higher credit limits.
The new law will require BNPL companies to follow “responsible lending” obligations that include running credit checks before lending, notifying customers when credit limits increase and following dispute-resolution processes that are bound in law.
The plans outlined on Monday will now involve industry consultation on the detail, Jones said. They will bring the industry “into line with other regulated credit providers, simplifying our regulatory system and addressing concerns about competitive neutrality”, he added.
The government will unveil the draft legislation for consultation later this year, and the bill will be introduced in parliament by the end of this year.
A spokesperson for Afterpay, which offers BNPL services, said the change was a “strong first step in the development of a fit-for-purpose BNPL regulatory framework”.
Peter Gray, chief operating officer of Australia’s biggest standalone BNPL provider, Zip, said the change would mean “business as usual” since the company already complied with Australian credit law for some products.
The Australian Finance Industry Association, which had hoped its BNPL code of conduct would form the basis of self-regulation, said it would “continue to work collaboratively with the government on the details of future regulation”.
Shares of Australian-listed BNPL providers were mixed by mid-session as investors digested the regulatory development that was largely expected. Locally listed shares of Afterpay owner Block were down 1.5 per cent, while shares of Zip fell 5 per cent.
“The BNPL business model is still a structural growth model,” said Shaun Ler, a Morningstar analyst.
“You end up in a situation where everyone is suffering, but your competitors are suffering even more and the demand is still there,” he added.
Andrew Grant, a finance lecturer at University of Sydney Business School, said the regulations “should help to create transparency for credit providers in the industry, without harming the majority of users who have a great experience with BNPL products”. BLOOMBERG, REUTERS
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