The Australian government is looking to tighten the regulation of the “buy now, pay later” (BNPL) sector as it hopes to stop more customers from falling into dire financial straits.
Speaking to
Nine Network on Nov. 21, Financial Services Minister Stephen Jones said the BNPL industry could be subject to the same regulation as the credit and banking sector.
He said the minimum changes could involve introducing credit checks to make sure that BNPL products were suitable for customers.
“A lot of people have got not one, not two, but three or four ‘buy now pay later’ accounts, and it appears there is a small percentage of the market where people are getting into hot water,”
Jones said.
“No one company knew the other one had one, and this person was just simply unable to pay off their debts, and they were in a dire credit downward spiral.”
‘Buy Now Pay Later’ Gaining Traction
Young Australians under the age of 40 have taken quickly to BNPL with Afterpay and Zip Co two of the largest players in the market, according to the
Reserve Bank of Australia.
BNPL allows individuals to buy goods or services from participating retailers and to pay off the item six weeks after acquiring it (over four installments).
The sector saw robust growth during the COVID-19 pandemic with the number of
active BNPL accounts in Australia soaring from 5 to 7 million in the 12 months to June 2022, and the value of transactions jumping 37 percent to $16 billion (US$10.6 billion) in the 2021-2022 financial year.
However,
BNPL products are neither regulated under the Credit Act nor subject to lending standards, as they comprise a category of credit exempt from the legislation.
BNPL providers are also not required to hold an Australian Credit Licence to operate in the country, which is required for banks.
As the industry booms, a number of
issues have emerged including inappropriate lending practices, poor complaints handling processes, and excessive charges and fees.
At the same time, there is evidence that a portion of users now suffers financial difficulty.
Research by the Australian Securities and Investments Commission in 2021 showed that BNPL users were more likely to experience financial stress than the general population, and twice as likely to be under financial stress compared to credit card holders.
It also found that one in five BNPL users had to cut back or go without basic essentials like food to make repayments on time, while one in six had to take out additional loans to cover their repayments.
Submissions on New Framework Welcome
The
federal government is now opening consultations on a regulatory framework for the future development of BNPL in Australia.
The
Treasury Department has put up several options for reforming the BNPL sector including strengthening the industry code with a new “affordability test,” and bringing the payment service under the umbrella of the Credit Act either partially or completely.
Regarding the pace of the reform, the financial service minister indicated that the government would finalise the changes within 12 months.
“We want innovation, we want people to have access to these great products, but we want to ensure that there are proper guardrails in place,”
Jones said.
