The Labor government, spoiling for its next fight against the ills of society, has squared up to the buy now, pay later industry. The financial services used by millions of Australians are set for a shake-up after Financial Services Minister Stephen Jones announced on Monday that he would seek to regulate BNPL schemes like credit.
“BNPL looks like credit, it acts like credit, it carries the risks of credit,” Jones told reporters in a speech in Sydney.
“Our plan prevents lending to those who cannot afford it without stopping safe, prudent BNPL use.”
The changes would see Australia, the home of BNPL giants Afterpay and Zip Pay, become the most heavily regulated services in the world, second only to the UK.
BNPL, which has been available since the middle of the last decade, allows people to purchase goods and services without having to stump up the immediate total cost. Typically, payments are deducted from the purchaser’s account in four smaller sums over a period of weeks or months.
Financial companies providing PNPL schemes took off during the COVID-19 pandemic when online shopping saw a major increase.
However, they have long been associated with paycheque-to-paycheque living, precarious financial arrangements, and debt cycles. Once used for things like simple clothing purchases, medical bills, pharmaceutical purchases, and even groceries can now be put on BNPL.
The rise of BNPL systems is also thought to have contributed to the decline in credit card usage, which the government is now saying is problematic, given that they are not regulated in the same way.
With big changes on the horizon that could affect the way you shop, here’s what you need to know about the regulations coming to BNPL.
Buy Now Pay Later to Be Regulated As Credit
Because BNPL schemes are not classified as credit products, they are not subject to the same checks as credit cards.
As such, there have been numerous problems related to them, ranging from people overleveraging themselves in debt to financial abuse in partner-violence situations.
The government has indicated that this will change, although no legislation has been put forward yet to cement these proposals.
However, instead of regulating the industry entirely under the Credit Act, the government has indicated that it will be introducing “limited” regulation using this legislation.
BNPL payments will be considered as credit products and will have to increase their standards to comply with Responsible Lending Obligations and Australian Credit Licences.
For users, this means you’ll likely find it harder to access BNPL services, with greater checks put in place to ensure that you actually do have the means to pay back loans you’re taking out.
There will also be better protections put in place, with caps on how much can be charged in late fees and interest, as well as extra scrutiny on who is actually opening each BNPL account.
The perils or positives of BNPL systems is a complex conversation. While most do not charge interest on purchases, at least a good portion of the revenue generated in these companies is drawn from late fees charged to users.
The Australian Securities and Investments Commission found, in 2020, that one in five users of BNPL schemes missed payments and that those who did were often below the age of 30 and were found to be cutting back on essentials in order to keep up. ASIC recommended tougher regulations on the industry than what the government is suggesting.
In addition, family violence charity Good Shepherd, which specialises in financial abuse help, has long been campaigning for the government to make moves in this sector. They argue that these products allow abusers to trap women in abusive and coercive debt situations.
Evidence they’ve gathered through helping women out of these situations has indicated BNPL is a factor in half of the financial abuse cases they see. One case study they’ve released as an example indicates the need for regulation here.
“It seemed like a smart idea – you get what you need and pay it off over time,” Sonja said in a statement by Good Shepherd.
“But I was in a violent relationship and was financially controlled for a long time. He made me take out multiple BNPL accounts again and again, and they were just approved. No questions asked”.
With the changes that the government is proposing, Good Sheperd hopes that at least some of these loopholes will be closed. However, Dr Roslyn Russell, Director of Research at the charity, has said that she will wait and see what the details are before passing judgement on the changes.
Buy Now Pay Later Stocks React
BNPL companies have reacted rather cautiously to the speech from the Financial Services Minister, given they are yet to have any final decisions made about them and knowing that the government could come down a lot harder.
A spokesperson for Afterpay said that the proposal was a “strong first step in the development of a fit-for-purpose buy-now-pay-later regulatory framework”.
Zip’s COO, Peter Gray, said that the changes would mean “business as usual” for them since the company is already compliant with Australian credit law.
However, the market was not so sure as buy now pay later stocks wobbled in response to the news. Afterpay parent company Block saw its shares decline by 1.35%, while Zip dipped by 4.35% at the close of trading on Monday.
Jones said that the government is expecting to have legislation introduced into Parliament by the end of the year that will codify these changes. A draft bill will first be released for public consultation, which is expected to happen soon.
Despite offering “many opportunities across the Australian economy” for both consumers and businesses, Jones said in his speech that BNPL’s free reign is over.
“With those opportunities have come new and growing dangers to consumers, which up until now have been largely unregulated and unchecked,” Jones said.
“Our plan maintains the benefits of BNPL that many Australians enjoy, and we must ensure that providers will have appropriate safeguards in place, and we must ensure that they operate honestly, efficiently, and fairly, in line with other regulated credit products”.
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