Australia to regulate BNPL sector

This would come as being among the world’s hardest regimes for the sector, putting companies of the likes of Afterpay and Zip Co under the supervision of the Australian Securities and Investments Commission (ASIC). What is more, as per the Reuters article detailing the news, this would place Australia behind only the UK as being amongst the countries to have sought to regulate BNPL as a standard credit product.

BNPL in Australia and the regulation’s impact

BNPL companies typically provide on-the-spot interest-free short-term loans that require minimal credit checks and spread payments over the course of weeks or months, being leveraged predominantly by ‘cash-strapped’ people taking debt, at times exceeding what they can afford.

Due to the absence of interest charges, up until this point BNPL providers have been exempted from consumer credit regulation, with the sector having seen its business increase amid the online shopping growth spurred by COVID-19 stimulus payments, together with decreased interest rates. However, due to Australia’s struggles with high inflation, which currently sits at almost 30-year highs, concerns related to repayments have been growing, with Australia’s centre-left Labour government stating that BNPL is to be considered as credit, as it impacts borrowers the same.

As detailed by Reuters, Financial Services Minister Stephen Jones said that BNPL looks and acts like credit, carrying the risks associated with it, stating that their plan helps prevent lending to those who cannot afford it, without putting a stop to safe, prudent BNPL usage. Throughout 2021-2022, Australia had approximately 7 million BNPL accounts that resulted in AUD 16 billion (USD 11 billion) of transactions, a 37% increase from the previous years. When shopping online in 2022, Australians spent AUD 63.8 billion, with 26% of consumers advising they leveraged BNPL to pay for purchases, as per retail industry figures detailed in the announcement.

BNPL companies make most of their money by charging a sales revenue percentage to merchants, in exchange for having shoppers directed to them. Although they charge borrowers late fees, they say that they encourage on-time repayment with the promise of increased credit limits.

What is more, BNPL firms claim to monitor borrower activity closely, however, the new Australian law would require them to follow ‘responsible lending’ obligations, such as carrying out credit checks prior to lending, notifying customers whenever credit limits increase, and following dispute resolution processes bound in law.