Labor plans to rein in BNPL under traditional credit laws, adding new regulatory scrutiny to pay-in-four providers

Australia’s new Financial Services Minister Stephen Jones has declared it’s time to regulate buy now, pay later (BNPL) providers under traditional credit laws, heralding major changes to rules governing the multi-billion-dollar sector.

BNPL providers like Zip and Afterpay let consumers acquire clothes, food, or services with no up-front payment. Instead, their purchases are split into multiple installments, payable to the BNPL provider over a matter of weeks.

Unlike credit cards which charge consumers interest on the debts they accrue, most BNPL services are free for shoppers to use if they make their repayments on time.

Services like Zip and Afterpay make the bulk of their revenue from merchant fees, with participating retailers paying as much as 6% of purchases made through the system to their BNPL provider.

Because they do not charge interest or fees to consumers who make their repayments on time, BNPL operators argue they are not credit providers under the National Credit Act — the legal framework which forces credit providers to assess whether borrowers have the means to repay their loans, among other consumer protections.

Skyrocketing usage rates led the Australian Securities and Investments Commission (ASIC) to undertake a sector review in 2020, with the corporate watchdog finding around one in five BNPL users had skipped meals or cut back on essential purchases to meet their repayments.

However, the sector dodged new legislative burdens in early 2021 by agreeing to a self-imposed Code of Practice and vowing to provide minimum guardrails to consumers.

Time to “start working on regulating” the sector: Financial Services Minister Stephen Jones

The time has come for Australia to move beyond that model, Jones says.

In a new interview with The Guardian Australia, Jones said the argument over whether BNPL operates as credit is a “dead-end street”, with products like Zip and Afterpay acting as a “a good innovation in the credit market”.

Now, it’s time to “start working on regulating” the sector “within the credit space”.

The new Labor government welcomes the Code of Practice, Jones added, but hopes to “move to legislate it and fill any gaps”.

His statement follows on from the 2021 Mobile Payment and Digital Wallet Financial Services parliamentary report, in which Labor lawmakers argued “industry self-regulation is unlikely to be appropriate forever”.

The parliamentary committee also called for an official inquiry into the space in the next term of government.

Scrutiny over the sector is only set to grow after tech giant Apple declared it is entering the space, and will soon offer BNPL functionality to anyone using the latest version of Apple Pay — a move which will expand the reach of BNPL far beyond its current bounds.

New rules not a “major dislocation”, Zip says

With the government’s position now clear, and with consumer advocacy groups maintaining their calls for tighter legislation, Zip says it can weather the regulatory storm.

Regulation under the National Credit Act would not serve as a “major dislocation” for Zip, says Matthew Abbott, the company’s director of corporate affairs.

In a statement provided to SmartCompany, Abbott backed the company’s “sophisticated” credit assessments.

“We have always done credit checks and we look at bank account information,” he said.

“We make less than 1% of our revenue from late fees, so our model is not based on consumers falling behind for the economics to work.”

Zip would also support the opt-in BNPL Code of Practice become mandatory for all market entrants, he added.

The Australian Finance Industry Association (AFIA), the representative body which oversees the Code of Practice, also maintains the agreement is fit for purpose.

“The consumer protections that the community and consumer groups are asking for are already in the AFIA BNPL Code of Practice, which covers approximately 95% of the BNPL market by volume,” said AFIA CEO Diana Tate.

Outside of the rules prescribed by the National Credit Act, the self-imposed rules promote “proportionate suitability assessments before a customer can make a purchase and additional checks ‘in life’ to prevent customers extending themselves,” she added.

SmartCompany has contacted Afterpay for comment.