The Federal Government has today announced it will regulate buy-now pay-later (BNPL) schemes as credit products in an effort to mitigate the “growing dangers” of consumers racking up too much debt.
Assistant Treasurer Stephen Jones unveiled the reform at the Responsible Lending and Borrowing Summit, warning that tougher regulation of the sector was needed to protect vulnerable Australians.
The move comes six months since a Treasury paper assessed three possible alternative options, recommending the Government either choose the status quo with self-regulation, subjecting services to limited regulation under the Credit Act, or treating BNPL under the same laws as credit card providers.
Opting for the second choice, the Government has chosen to soon regulate approximately 7 million active BNPL accounts in Australia. According to Jones, consumers with BNPL use it every 18.2 transactions per annum, with an average transaction amount of $136.
“BNPL looks like credit, it acts like credit, it carries the risks of credit,” Jones said.
“Evidence suggests that those risks are disproportionately affecting women, First Nations communities and people on low incomes. We have heard that some people are opening multiple BNPL accounts, to access far more debt than they’d be able to get on a credit card or a payday loan.
“And 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.”
According to not-for-profit Good Shepherd, around 73 per cent of financial counsellors said last year that clients have missed essential payments, cut back on essentials or entirely gone without them to service BNPL debt.
Further government consultation revealed other concerns like excessive fees, poor disclosure practices, problematic marketing practices and unsolicited credit increases.
“Through its relatively low cost offering, BNPL has also provided a valuable source of competitive pressure on traditional credit products, such as credit cards or payday loans,” Jones said.
“But with those opportunities have come new and growing dangers to consumers, which up until now have been largely unregulated and unchecked.”
The reform will require BNPL providers to hold Australian credit licences, comply with responsible lending obligations, meet statutory dispute resolution and hardship requirements, comply with statutory product disclosure and other information obligations, and abide by existing restrictions on unacceptable marketing.
“Our plan will bring BNPL into line with other regulated credit providers, simplifying our regulatory system and addressing concerns about competitive neutrality,” Jones said.
“The responsible lending regime will be central to our approach. However, our legislation ensures that the obligations on BNPL providers are scalable and technologically neutral. We will make sure they are the right fit for the risk level of their products.
“Our plan prevents lending to those who cannot afford it, without stopping safe, prudent BNPL use.”
The government will release exposure draft legislation for consultation later this year, with the aim of introducing the final bill to Parliament by the end of 2023.
BNPL providers welcome government regulation
Fintech companies Zip (ASX: ZIP), Humm Group (ASX: HUM) and fintech Frollo have all welcomed the government’s reform to the BNPL sector, having previously advocated for a regulatory framework that provides consumer protection.
Zip co-founder and global chief operating officer Peter Gray said the decision meant ‘business as usual’ for the group, which received an Australian Credit Licence (ACL) in 2013.
Zip Money is also fully regulated under the National Consumer Credit Protection Act 2009 (NCCPA).
“Zip has been a vocal advocate of fit-for-purpose regulation for our industry since 2019 and we support the decision to further strengthen the BNPL regulatory framework proposed by Treasury as option two,” Gray said.
“We are already conducting identity, credit and affordability checks on our customers, and have done since inception in 2013, and would already be compliant with any new requirements.
“As a result, we have very good visibility over a customer's financial circumstances prior to signing them up. We generate less than 1 per cent of our revenue from late fees and 0.2 per cent of our customers are in hardship.”
In an announcement to the market today, Humm also fully supported the government’s decision, describing the reform as a balanced and proportional approach that will ensure consumer protection and promote responsible lending practices.
“Humm fully supports the government's position to enhance consumer protection measures and has previously advocated for bringing BNPL within the application of the National Credit Code and the requirements associated with it,” the company said.
“As a diversified provider of financial services, Humm has been offering regulated products for over 10 years through subsidiaries holding Australian Credit Licences. This extensive experience means that the company is well placed to respond to the new regulatory landscape.”
Simon Docherty, the chief customer officer at digital bank Frollo, added he was looking forward to the implementation of the new regulations, which are designed to safeguard vulnerable consumers.
“According to our recent research, there has been a staggering 25 per cent year-on-year surge in the usage of buy-now pay-later (BNPL) services, with individuals spending up to $420 each month on repayments and associated fees. Surprisingly, one in four BNPL users resorts to paying off their BNPL debt using a credit card,” he said.
“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.
“While BNPL and Pay Advance services can seem like a convenient way to manage expenses, they come with some serious risks for both consumers and lenders.”
The peak body for Australia’s fintech industry, FinTech Australia, has also announced today it is in support of the reform.
“We are pleased the government is taking this approach. Measured regulation is crucial in ensuring trust in Australia’s fintech industry, which is essential for its growth,” FinTech Australia general manager Rehan D'Almeida said.
“In our experience, the sector, and its founders, endeavour to grow their companies in a responsible manner. Considered regulation sets the bar for the sector and ensures that building trust and enhancing the lives of its consumers remains at its core.”
“This framework strikes a balance, designing a scalable and technology-neutral framework that embeds strong and effective consumer protections.”
Research by the Australian Financial Industry Association in 2022 found that BNPL created an additional $2.7 billion in new revenue for merchants via new customer acquisition, increased basket sizes and improved customer satisfaction.
At the time of writing, ZIP shares were down 5.22 per cent at 42cps.
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