Australian Government to Crack Down on Buy Now, Pay Later with Tougher Regulations

Zip signage is seen on a storefront in Sydney, Australia, on Oct. 22, 2019. (AAP Image/Derek Rose)

The Australian government will impose stricter regulations on the buy now, pay later (BNPL) industry amid concerns about high risks to vulnerable groups in society.

In his speech to the Responsible Lending and Borrowing Summit on May 22, Financial Services Minister Stephen Jones announced that the federal government would change the law to regulate BNPL like a credit product.

Under the proposed changes, BNPL providers will need to hold a credit licence and comply with Responsible Lending Obligations.

They will also be required to meet minimum standards set for the industry and hardship requirements and abide by marketing restrictions.

“Our plan will bring BNPL into line with other regulated credit providers, simplifying our regulatory system and addressing concerns about competitive neutrality,” Jones said.

“Our plan prevents lending to those who cannot afford it, without stopping safe, prudent BNPL use.”

The minister added that the government’s proposal would maintain the benefits of BNPL while ensuring that providers would have appropriate safeguards in place and meet the standards of other regulated credit products.

Nevertheless, the minister did not elaborate on how strict the credit checks on BNPL services would be and whether they would apply to loans of all sizes.

Speaking about the next steps, Jones said the government would be working closely with the industry and with consumer groups in the coming months to draft an appropriate legislation to be introduced to the parliament by the end of 2023.

The State of Buy Now, Pay Later in Australia

Despite being an emerging sector, BNPL has gained traction among the Australian population in recent years.

According to the Australian Finance Industry Association, there were 6.3 million active accounts in the country as of June 2022, up from 5.6 million in the previous year.

While BNPL only accounted for 0.66 percent of the total number of transactions, the industry contributed $18.4 billion to Australia’s GDP in the 2021-2022 financial year and supported 120,200 jobs.

The sector also generated $2.7 billion (US$1.79 billion) in new revenue for retailers during the year through customer acquisition, increased basket sizes and increased customer satisfaction and retention.

Major players in the sector include Afterpay, Zip, Klarna and Latitude.

On average, each consumer uses BNPL services for 18.2 transactions per year, and the value of each transaction was $136.

The association estimated that Australian consumers gained $337 million in benefits from using BNPL in 2021-2022, which derived from savings in interest and fee costs (compared to using credit cards), surcharge savings and other benefits arising from delayed payments.

While the financial services minister acknowledged the benefits provided by BNPL, he said there were new and growing dangers to consumers.

Financial Services Minister Stephen Jones at a press conference in Canberra, Australia, on Oct. 31, 2022. (AAP Image/Mick Tsikas)

“Evidence suggests that those risks are disproportionately affecting women, First Nations communities and people on low incomes,” Jones said.

“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.”

Jones also cited data from the Australian Securities and Investments Commission indicating 19 percent of BNPL consumers showed two or more indicators of financial stress, such as cutting back on essential items or missing payments on other bills.

“These accounts tell us that doing nothing is not an option,” he said.

Response from Politicians and Relevant Parties

Following Jones’ speech, National Pary Leader David Littleproud expressed willingness to support the changes to BNPL regulations.

“We'll be constructive on this because this is an evolving part of capital markets ... sometimes we have to move with to make sure that we protect those that are most vulnerable,” he said.

While Greens leader Adam Bandt said his party would consider the proposal, he noted that many Australians relied on BNPL to pay for housing and food.

“The government’s got to do more than just take away options for people. It’s got to give people the ability to deal with the cost-of-living crisis by freezing rents or freezing mortgages and by lifting people out of poverty,” he told reporters.

Meanwhile, Alan Kirkland, the CEO of the consumer advocacy group CHOICE, called on the government to impose strong requirements on the credit product regardless of the amount borrowed.

“While the government has said these will be scalable, we should not assume that small loans are automatically safe,” Kirkland said.

“Many of the people who end up in financial hardship as a result of BNPL have smaller loans, often many of them.

“The government needs to resist pressure from the industry to build carve-outs in these new laws.”

Financial Counselling Australia, a peak industry body, was concerned that the government’s approach was insufficient to protect vulnerable consumers.

“Too many financial counselling clients have multiple BNPL accounts. The government’s approach will only work if there is a requirement for BNPL providers to be part of the credit reporting system to reduce the risk of over-commitment,” Financial Counselling Australia CEO Fiona Guthrie said.