BNPL industry to face tougher regulation, as survey finds users still falling into strife

RateCity.com.au welcomes the government’s move to regulate the burgeoning buy now, pay later sector, and warns any change must protect people from accessing multiple debts they can’t afford to repay.

The new Treasury paper released by Financial Services Minister Stephen Jones today outlines three options for regulatory intervention of the buy now, pay later (BNPL) sector:

• Option 1: develop a mandatory industry-specific code without the need for an Australian Credit Licence.
• Option 2: bring the BNPL sector under the Credit Act but apply a more moderate set of responsible lending obligations.
• Option 3: bring the BNPL sector under the Credit Act and apply similar rules as those for credit cards and other loan products.

RateCity.com.au believes the regulation must require providers to carry out a proper assessment of a person’s ability to repay not just the credit they are applying for, but all existing debts they have access to, including other BNPL accounts.

BNPL providers must also be required to report defaults to the credit bureaus to give providers a more comprehensive picture of a person’s ability to repay their debts on time.

Option three is the clearest choice to achieve this. Option two may also be suitable if the obligations ensured providers check a person’s existing debts. Any exemptions provided under option two would need to be scrutinised carefully to make sure they did not become loopholes.

What BNPL regulation is needed:

• An assessment of a person’s ability to repay the entire credit limit, and all other debts including other BNPL accounts.
• Mandatory reporting to credit bureaus.
• Cap on late fees.
• Freezing of accounts for people late making payments.
• Ability to close accounts easily and online.
• Providers should also be a member of the financial complaints authority, AFCA, for fast and effective dispute resolution.

Over the last eight years, the BNPL sector has enabled millions of Australians to pay for items in instalments, helping many people budget for big ticket purchases. However, it has also put millions of Australians into financial hot water.

A new RateCity.com.au survey of over 1,000 respondents found 37 per cent of people have used at least one BNPL product within the past 12 months. Of those, 41 per cent have found themselves in some level of financial trouble using these platforms, at least once in the past year, including:

• 18% have missed paying bills, such as their mortgage, to meet BNPL payments.
• 15% have had to cut back on essentials, such as meals, to meet BNPL payments.
• 13% have borrowed money from friends or family to meet BNPL payments.
• 43% had access to more than one account.

BNPL regulation – what’s currently in place

Currently the BNPL industry is self-regulated with an AFIA Buy Now Pay Later Code of Practice. However, the code is voluntary and while Afterpay, Brighte, Humm Group, Klarna, Latitude, Openpay, Payright and Zip Co have all signed up to the code, new entrants such as CBA, NAB and PayPal have not.

The code includes caps on late fees, freezing of accounts when repayments are missed, support for vulnerable customers and a requirement to prominently display key information.

However, the code does little to limit people from signing up to multiple debts, a key issue identified by ASIC. It also allows platforms to, in most cases, skip credit checks when offering less than $2,000 credit for new customers and $3,000 credit for existing customers.

RateCity.com.au research director, Sally Tindall, said: “This intervention might be long overdue but at least it’s finally moving in the right direction.”

“Four years ago, ASIC released its first damning report into the havoc buy now, pay later services can inflict on people’s finances, yet to date, very little has been done to prevent this,” she said.

“It’s time to introduce strong regulation to help protect the millions of Australians regularly using buy now, pay later services, many of which are getting themselves into serious financial hot water.

“Our research shows 41 per cent of buy now, pay later users had gotten into financial trouble using these platforms, yet the sector continues to grow by the day, without effective measures in place to protect them.

“The new regulation must ensure all providers check a person’s ability to repay the maximum credit they are applying for, in addition to all other credit they have access to.

“Currently, people can sign up to several buy now, pay later accounts, giving them access to credit totalling thousands of dollars, without anyone checking to see if they’re in a financial position to pay it all back.

“The regulation must also force every buy now, pay later provider to report repayment history and hardship applications to the credit reporting bureaus to ensure integrity in this system.

“Option three, while potentially onerous for some smaller providers, ticks these important boxes.

“Treasury’s second option might also have merit, however, it would depend what exemptions to the responsible lending obligations the government is willing to handout.

“There’s no point creating new regulation that comes pre-loaded with loopholes, ready to be flouted by providers and consumers from day one,” she said.

Tips to avoid getting into trouble using BNPL platforms:

• Read the terms and conditions and understand which fees you could get hit with.
• Set yourself strict spending limits.
• Limit yourself to one platform, and one purchase at a time.
• Don’t impulse buy. Sit on any major purchases for at least 24 hours.
• If you get into trouble, pull the pin and call for help. Each platform should have a hardship policy to help you get out of trouble.

BNPL platforms - some of the key players in Australia

Note: excludes providers offering BNPL on a single product or service.