Australia is set to implement strict regulations on buy-now-pay-later (BNPL) services, treating them as consumer credit products under new laws. This move will require BNPL providers, such as Afterpay and Zip Co, to conduct background checks before offering loans, making Australia one of the toughest in the world for the startup sector.
Currently, BNPL companies offer interest-free short-term loans with minimal credit checks, allowing customers to spread payments over several weeks or months. These services have gained popularity, especially among financially constrained individuals who sometimes take on more debt than they can afford. As the absence of interest charges has exempted BNPL providers from consumer credit regulation, the sector has experienced rapid growth, fueled by online shopping surges during the COVID-19 pandemic.
However, concerns about repayment have risen as Australia battles high inflation. The country’s Labor government argues that BNPL should be considered credit since it has the same impact on borrowers. As a result, the Australian Securities and Investments Commission (ASIC) will oversee BNPL companies, placing Australia second only to Britain in terms of regulating BNPL as a standard credit product.
Australia is home to around a dozen listed BNPL providers with approximately 7 million active BNPL accounts resulting in $11 billion worth of transactions in 2021-22, a 37% increase over 2020-2021. BNPL usage is significant, with 26% of Australians reporting that they have used these services to pay for purchases, contributing to the $63.8 billion spent on online shopping in 2022.
BNPL companies generate revenue by charging merchants a percentage of sales and borrowers late fees. They incentivize on-time repayment by offering higher credit limits. While these firms claim to closely monitor borrower activity, new Australian regulations will mandate “responsible lending,” including mandatory credit checks, notification of credit limit increases, and compliance with dispute resolution procedures outlined in the law.
Draft legislation for these regulations will be introduced later this year, and it is expected that the bill will be introduced in Parliament by the end of the year. Afterpay and Zip Co have reacted to the upcoming changes, with Afterpay stating that it is a “strong first step” toward an appropriate regulatory framework, while Zip’s CEO believes the changes will have little impact on the company’s operations, as it already complies with Australian credit laws for some products.
Some analysts believe the industry’s structural growth model will endure, as demand for BNPL services remains high despite potential challenges in the sector. Proponents of the regulations believe they will promote transparency for credit providers while protecting the majority of users who have had positive experiences with BNPL products.
