New regulations for buy now, pay later industry

The government has heeded growing calls to regulate the buy now, pay later (BNPL) industry to better protect customers. 

At a conference in May, Assistant Treasurer and Minister for Financial Services, Stephen Jones, announced moves to have BNPL offerings regulated as credit products under the Australian Securities and Investments Commission. 

“BNPL looks like credit, it acts like credit, it carries the risks of credit,” he said at the time. 

He said the government planned to have exposure draft legislation out for consultation later this year and to introduce the final bill into the parliament by the end of the year. At this stage, it’s not clear when any changes will kick in. 

BNPL products typically offer interest-free short-term loans with minimal credit checks that spread payments over a certain period. 

Under the government’s plans, BNPL providers would now be required to hold an Australian credit license, meet statutory dispute resolution and hardship requirements and comply with statutory product disclosure and other information obligations. 

They would also have to abide by existing restrictions on unacceptable marketing and meet a range of other minimum standards related to their conduct and their products. 

Further to this, BNPL providers would need to comply with responsible lending obligations to ensure they don’t grant loans that will cause hardship in the long run. As a result, they will have to make reasonable inquiries about a consumer’s financial situation, requirements and objectives. 

Protecting consumers

Jones said the government had moved to regulate BNPL providers following extensive consultations with various stakeholders last year. 

He noted that many Australians who had been excluded from traditional forms of credit had used BNPL carefully and frugally to smooth the impact of large expenses. “Some people use it for years and never miss a payment,” he said. 

But he noted that BNPL options also came with new and growing dangers to consumers, which up until now have been largely unregulated and unchecked. 

“Evidence suggests that those risks are disproportionately affecting women, First Nations communities and people on low incomes,” he said. 

“We have heard that some people are opening multiple BNPL accounts, to access far more debt than they’d be able to get on a credit card or a payday loan. 

“We have also heard that some people may be weaponizing BNPL products in abusive relationships – doing things like coercing their partners to take on BNPL debts or taking out BNPL debts in their partner’s name without their knowledge.” 

Indeed, the Australian Securities and Investments Commission has found that 19% of BNPL consumers showed two or more indicators of financial stress, such as cutting back on essential items or missing payments on other bills. 

Plus, a government review late last year found that BNPL customers are more than twice as likely to end up in financial trouble as credit card customers. It also picked up signs of excessive fees, poor disclosure practices, problematic marketing practices and unsolicited credit increases charged by BNPL operators. 

Current state of affairs

The BNPL industry isn’t entirely without regulation though. 

Since 2021, BNPL providers have been subject to the design and distribution obligations (DDO) regime which allows ASIC to temporarily intervene when necessary and to ban products when there is a risk of significant consumer detriment. 

In March 2021, the Australian Finance Industry Association’s code of practice for the BNPL sector came into effect. It sets best practice standards for the sector and strengthens consumer protections while preserving customer choice to make purchases and payments in a way that suits their needs and preferences. 

The seven BNPL providers who voluntarily subscribe to this code represented around 90% of the BNPL market, based on the number of active accounts as of 30 June 2022. 

According to Jones, there are now around seven million active BNPL accounts in Australia. 

“The average BNPL consumer uses it for 18.2 transactions per annum, with an average transaction amount of $136,” he said. 

“Studies from the AFIA tell us that in 2022, BNPL created an additional $2.7 billion in new revenue for merchants, through new customer acquisition, increased basket sizes and increased customer satisfaction and retention. 

“And, through its relatively low‑cost offering, BNPL has also provided a valuable source of competitive pressure on traditional credit products, such as credit cards or payday loans.” 

Call us to find out more about how debts and changes to BNPL services may affect your business.