Australia | Jun 01 2023
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-BNPL to be regulated as credit in Australia
-Service increasingly important for Australian households under duress
-Industry will be forced to perform mandatory background checks
-Multiple ASX-listed companies might be affected
By Riley Young
The Australian government has announced plans to enact a new law to regulate buy-now, pay-later (BNPL) firms, requiring them to carry out mandatory background checks before lending.
As a result, BNPL companies are likely to find it more difficult to access capital.
Speaking at a press conference in Sydney, Monday 22nd May, Finance Services Minister, Steven Jones declared BNPL is credit since it looks like and acts like it.
In a country where BNPL companies play a critical role in the economy, with these regulations, Australia joins the United Kingdom in enacting such legislation.
What’s buy now, pay later?
Buy-now, pay-later is an arrangement through which you can purchase products or services today and pay for them later in regular instalments.
BNPL companies initially offered these services on the purchase of electronics and clothes. Today, many Australians are using it to pay for groceries and an assortment of services.
What role do BNPL companies play in the economy?
Since 2020, during the COVID-19 pandemic, Australia has experienced soaring inflation never seen in the country for the past 30 years.
As a result, life has become a lot more expensive, with at least 54% of young Australians ditching credit cards due to increased interest rates in 2021, according to available data.
Instead of the traditional electronics and technological products, a large portion of the Australian population has turned to BNPL for basics like food.
In 2022, BNPL companies injected up to $18.4bn into the economy by advancing credit to at least 6.3 million Australians, reports indicate.
The average value of a BNPL transaction was $136 in 2022, according to data from the Australian Finance Industry Association (AFIA).
Therefore, BNPL companies play a critical role in the Australian economy by providing credit to individuals who would, otherwise, have failed to access it.
The need for regulations
For a long time, BNPL companies have operated without state regulation since they do not charge interest on their products.
BNPL products basically provide an alternative to conventional credit, giving consumers access to interest-free finance to pay for bills, goods, and services.
When you want to purchase a good, for example, a BNPL company pays the merchant the full cost upfront, minus any fees. Once you have received the goods, you can repay the BNPL company in regular instalments.
BNPL companies make profit by charging the participating merchants for their service.
Instead of interest, BNPL users pay a small fixed fee to the BNPL company. Therefore, it’s been unnecessary for BNPL to face any sort of regulation, including the Australian Credit License (ACL).
Standard laws regulating lenders in Australia include the Credit Act, National Consumer Protection (NCCP) Act, Australia Securities and Investments Commission (ASIC) Act, Australian Consumer Law and Anti-Money-Laundering/Counter Terrorism Financing Regime, and the Corporation Act.
The BNPL sector largely operates as it wishes, including lending money to people who can hardly repay, thus worsening bad situations, industry observers claim.
The new regulations
With the proposed regulations, the Australian government will require BNPL companies to perform mandatory background checks to only lend to consumers who can repay.
Although it’s not clear if the new regulatory regime will be under a new or existing Act of Parliament, with the new laws Australia’s would be one of the toughest regimes for BNPL services providers worldwide.
The new framework will give ASIC the power to regulate BNPL companies like Afterpay ((SQ2)), now part of Block Inc, and Zip Co ((ZIP)), which have traditionally given short-term, on-the-spot, interest-free loans to borrowers who might not get credit elsewhere.
The Australian government seeks to stop BNPL companies from “lending to those who cannot afford it, without stopping safe, prudent use,” said Mr. Jones.
While analysis of the proposed legislation indicate it could negatively impact the sector, major industry players don’t seem worried about it reducing the number of possible borrowers.
According to a spokesperson of Afterpay, the local company that effectively invented the service, the new law is a “strong first step in the development of a fit-for-purpose buy-now, pay-later regulatory framework.”
For Peter Gray, Chief Operating Officer Zip Co, the change in the law regulating BNPL firms would be “business as usual,” adding the company has met requirements of most Australian credit laws for some of their products. So, putting BNPL products under government regulation should be easy.
Analysts and industry observers say the purpose of the regulations is to make the industry more transparent.
University of Sydney Business School lecturer, Andrew Grant, says the new regulations “should help create transparency for credit providers in the industry, without harming the majority of users who have a great experience with BNPL products.”
Apart from seeking to strengthen the BNPL industry code by amending the National Consumer Credit Protection (NCCP) Act, the new regulation will put BNPL companies under the Credit Act.
If industry players agree and the Australian parliament enacts the latest BNPL regulations, there will likely be a strengthening of the Industry Code to the highest level.
ASX-listed companies that might equally be affected by the upcoming new regulatory regime in Australia include Earlypay ((EPY)), Humm Group ((HUM)), IOUpay ((IOU)), Latitude Group ((LFS)), Openpay Group ((OPY)), and Smartpay Holdings ((SMP)).
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