Key points
- The government is considering how to regulate Australia's burgeoning buy now, pay later industry.
- There are three options on the table, and consumer advocates want to see the toughest one implemented.
- It's expected that industry changes would be finalised within a one-year window.
A crackdown on Australia's booming buy now, pay later (BNPL) is coming, and it's set to change the way customers use the services forever.
Around 20 BNPL providers operate in Australia, including well-known brands Afterpay and Zip. They allow customers to defer payments on everything from clothes to utility bills, and even renovations. It's a rapidly-growing industry, with the number of BNPL accounts having surged from five million to seven million over the past financial year.
It's also one that's received criticism, particularly from consumer advocates who say it's effectively a credit product but is not treated like one.
But that could soon change, with the government on three proposed options for reform — the toughest being full regulation of the industry.
It comes at a time when other countries are also considering new approaches to the BNPL industry, including New Zealand and the United Kingdom.
How could buy now, pay later change?: The three options on the table
Consumer advocates have for years been calling for the government to crack down on the BNPL sector, which does not come under the Credit Act. This means BNPL companies are not legally obligated to follow responsible lending obligations, which aim to ensure lenders only issue a loan product that is suitable for the borrower.
Last year, the industry moved to address concerns through self-regulation. Its code of practice, which orders suitability assessments for transactions over $2,000, formalised rules that some BNPL providers were already following. It is also not legally enforceable and failure to comply does not attract penalties — although its oversight body, the Code Compliance Committee, has previously said it could "publicly name" companies in the event of a "significant" breach.
Of the approximately 20 BNPL providers that operate in Australia, nine are signatories to the code.
Around 20 BNPL providers operate in Australia, including well-known brands Afterpay and Zip. Source: AAP / Derek Rose
The first would see the existing industry code strengthened and the introduction of an affordability test, which could include credit checks. However, it would not require a provider to verify a customer's financial situation.
The second would bring BNPL services partially under the Credit Act and strengthen the industry code. Providers would be subject to a "tailored" version of the Credit Act's responsible lending obligations, but it's possible this would not require them to verify a customer's financial documentation or check the credit meets a borrower's needs. Providers would need to obtain an Australian credit licence, would not be allowed to increase a customer's spending limit unless given permission, and would need to adhere to dispute resolution requirements and hardship provisions under the Credit Act.
The third would see the industry fully regulated by the Credit Act.
Financial Services Minister Stephen Jones told the Nine network's Today program on Monday that credit checks were likely to be implemented at a minimum.
Advocates have welcomed the review and want the government to fully regulate the industry. Consumer Action Law Centre CEO Gerard Brody said the group's submission to Treasury's consultation would call for option three to be implemented.
"It would mean that these lenders are licenced, and would require them to comply with responsible lending obligations," Mr Brody said. "They would have to make sure repayments don't cause substantial financial hardship; offer assistance to customers who are struggling to make repayments, and comply with dispute resolution standards.
He said that while self-regulation was important, it was "no substitute for law".
Financial Services Minister Stephen Jones said on Monday that credit checks were likely to be implemented at a minimum. Source: AAP / Mick Tsikas
“Many of the people using BNPL are on low, and sometimes, precarious incomes. While the amounts people borrow may look small, the impact when the debt cannot be paid is not. People are having to forgo other essential items in order to pay their BNPL debts," she said.
“BNPL is credit, plain and simple, so it needs to be regulated in the same way as other credit products to provide people with adequate safeguards.”
Treasury's discussion paper on the review noted the Australian Financial Complaints Authority (AFCA) received 767 complaints relating to BNPL products in 2020-21. It said the relatively low number may be due to customers resolving disputes directly with the BNPL provider, but also flags concerns raised by consumer groups who claim vulnerable customers may not be aware of AFCA or how to raise a complaint with it.
Diane Tate, the CEO of the Australian Finance Industry Association, which helped develop the industry's self-regulatory code, said she welcomed the review but any changes that stemmed from it needed to be "fit for purpose".
"We aren't opposed to regulation, but it needs to be right-sized and it needs to reflect how things really work and how customers are actually using it. We will continue to advocate for regulation that is fit for the future," Ms Tate said. She added the code was under review.
Mr Jones said changes should be finalised within a one-year window.
