BNPL products like Afterpay will now have similar regulation to credit cards

Calls for regulation on Buy Now Pay Later (BNPL) products are finally being heeded. Today the federal government will be announcing that services such as Afterpay and Zip will be considered credit products and therefore regulated under The Credit Act.

Financial Services Minister Stephen Jones will make the announcement during the Responsible Lending and Borrowing Conference today.

Why BNPL products have come under fire

BNPL platforms have come under intense scrutiny ever since entering the market. These products have allowed users to make purchases and pay for them later with interest, with none of the same checks as traditional credit cards or oversight from ASIC.

They have been particularly criticised for the financial risk they pose to young and at-risk customers.

Products such as Afterpay don’t have the same large limits as credit cards. Instead, they offer smaller limits at around $600, but this can go up to $3000 if customers have been meeting their repayments.

However, that doesn’t mean the credit ends there. According to Jones, some customers have opened multiple BNPL accounts, putting themselves in further debt than they would be if accessing a regulated credit card or payday loan.

“We have also heard that some people may be weaponising 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,” Jones said.

In a 2022 report from the Australian Finance Industry Association (AFIA), there are at least 5.9 million active BNPL accounts across Australia.

Research from Frollo has also revealed a 35% YoY increase in BNPL usage, with individuals spending up to $420 each month on repayments and fees.

“Surprisingly, one in four BNPL users resorts to paying off their BNPL debt using a credit card.” Simon Docherty, chief customer officer at Frollo, said in an email to SmartCompany.

“Furthermore, our findings reveal that BNPL users are more than twice as likely to also engage with Pay Advance (short-term credit) services compared to the general population. On average, Pay Advance users now spend $749 monthly to service their debt, marking a concerning 60% increase since last year.”

What regulation of BNPL products means

Coming under The Credit Act means that BNPL services would adhere to similar responsible lending checks as traditional lenders.

In his speech, Jones said that BNPL has “growing dangers to consumers, which up until now have been largely unregulated and unchecked”.

“The plan will protect people from the spirals of harm that unregulated, unrestricted lending can cause.”

The regulation of BNPL platforms has been a long time coming — and it’s something that already exists in the US. In Australia, it’s the result of a consultation paper released by Treasury in November of 2022. This included several options for potential regulatory frameworks for BNPL products.

Being treated as credit products means that BNPL platforms will be required to have a credit licence, as well as minimum standards of conduct and hardship requirements. They will also need to meet modified Responsible Lending Obligations (RLOs) to determine unsuitability, combined with a strengthened Industry Code.

Back in January, Afterpay was open to regulation but critical of some potential aspects.

“I think we recognise that credit checks have a role to play, we just don’t agree with some of the sentiment expressed by others that credit checks and the credit reporting system are somehow a panacea and a sort of fundamental part of consumer protection,” Michael Saadat, Afterpay’s international head of public policy, said at the time.

Saadt also said at the time that BNPL is different from credit cards due to the low-interest rates and spending limits — and that banks were in favour of strict regulation to protect their own lending profits from credit cards.

“Our current model exposes customers to the lowest possible risk,” an Afterpay spokesperson said to SmartCompany in an email in January.

But despite arguments around the differences in limits and interest rates, Treasury is adamant about BNPL being regulated.

“BNPL looks like credit, it acts like credit, it carries the risks of credit,” Jones said.

However, Jones acknowledged the difference between credit cards and BNPL products and said regulation would reflect this.

“While BNPL customers are more than twice as likely to end up in financial trouble as a credit card customer, the risk is only half as big as for consumer leases and payday loans,” Jones said.

“Our plan will bring BNPL into line with other regulated credit providers and ensure that the obligations of BNPL providers are scalable and technologically neutral. We will make sure they are the right fit for the risk level of their products.”

Afterpay has welcomed the regulation that is now being proposed.

“Today’s announcement from the Government is a strong step in the development of a fit-for-purpose Buy Now Pay Later regulatory framework that embeds effective consumer protections, generates positive outcomes for consumers and businesses, and provides certainty for industry,” an Afterpay spokesperson said in an email to SmartCompany.

“We look forward to working with the Government, consumer groups and other stakeholders to get the details right in the coming months and build on the many consumer protections we already provide and set high industry standards across the board for all providers of a BNPL service.”

FinTech Australia is supportive of BNPL products and the competition it brings to the sector, as well as bespoke regulation.

“Buy Now Pay Later is an Australian innovation story that has been exported around the world, generating competition and consumer choice,” FinTech Australia General Manager, Rehan D’Almeida, said in a statement.

“Crucially, it recognises the distinct differences between BNPL and traditional credit products, and is a vote of confidence in a sector that delivers positive outcomes for customers, businesses and the broader economy.

“As new technologies and digital services disrupt and create better consumer experiences, we need regulatory frameworks that value these innovations, protect consumers, and encourage competition.”