BNPL in credit crunch

Regulation finally catches up with booming industry

Buy now, pay later payment companies including Afterpay will be treated as credit providers and will have to comply with responsible lending obligations, under proposed federal government changes.

Following prolonged reviews by regulators and government, Financial Services Minister Stephen Jones said BNPL providers would be required to hold an Australian credit licence, meet hardship and dispute resolution requirements, and product disclosure obligations.

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

He said the “responsible lending regime will be central” to the regulatory overhaul of the industry, but that the new obligations on BNPL providers would be “scaleable”.

In Australia, providers have enjoyed explosive growth from 2018 to 2021 without credit regulation and in an environment with low interest rates and inflation. There are seven million BNPL accounts in Australia, making 18 payments worth $136 on average.

But the industry is now struggling with higher funding costs, higher prices and tougher scrutiny. The announcement of tougher regulations follows a government review that highlighted lax lending practices that were contributing to financial stress, excessive consumer fees and disproportionate charges when compared with other credit products.

A separate review by the Australian Securities and Investments Commission last year found one in every five users of BNPL showed two or more indicators of financial stress, such as cutting back on essential groceries or missing payments on other bills.

“The people who know told us that there were unacceptable levels of unaffordable lending occurring, largely concentrated among low-income borrowers, including those on social security,” Mr Jones said.

Implementing a customised version of responsible lending requirements would require providers to evaluate whether BNPL was appropriate for a customer.

Treasurer Jim Chalmers said the industry would be consulted on the new legislation, which would be introduced by the end of the year.

There would be a transition period for those that don’t meet the stricter lending standards.

“There needs to be the right rules and regulations around (BNPL),” Mr Chalmers said.