Call for full BNPL regulation gains more supporters

Following on from the Treasury’s consultation on how the buy now, pay later (BNPL) in Australia should be regulated, more players have backed option 3; for BNPL to come under the Credit Act and have full responsible lending obligations (RLOs).

The Australian Retail Credit Association (ARCA) — a body for organisations involved in the disclosure, exchange, and application of credit reporting data in Australia — has outlined in its submission to Treasury that the body has long believed that BNPL is credit under the Privacy Act and should be regulated under the National Credit Code.

The body, which has previously helped draft components of the legal framework supporting credit providers and consumers (including the Credit Reporting Code and industry rules for data sharing), has previously found that:

• Almost half (49 per cent) of Australians have used buy now, pay later services/products (for example, Afterpay, Zip, and Klarna).
• Over a third (34 per cent) of Australians who have used buy now, pay later products have been late on their payments.
• Australians who have used buy now, pay later services/ products are more likely to have more than one (1.64) buy now, pay later accounts.   

As such, it reiterated its position that buy now, pay later (BNPL) should be regulated as credit to protect consumers from harm.

ARCA chief executive Elsa Markula commented: “We’re happy for the industry to move beyond tying itself up in knots asking how BNPL should be characterised, and instead now move to ensure that BNPL is properly integrated within the existing credit regulatory and reporting framework.

“By including BNPL in credit reporting, all credit providers will be able to gain better insights into the BNPL sector. For BNPL providers, inclusion in credit reporting will ensure products are better tailored to those customers who use BNPL responsibly and as a budgetary tool and will provide an effective means to readily identify those customers at risk of over-indebtedness.”

The ARCA CEO also flagged that including BNPL in credit scores could also benefit borrowers, too. 

“With BNPL included in credit reporting, consumers’ responsible and managed use of BNPL can help them when they need to apply for credit to support their next life stage, whether that’s buying a car or seeking a home loan,” she said.

The body’s general manager for policy and advocacy, Michael Blyth, also noted that the existing credit regulatory framework is designed to be “comprehensive and flexible” and can therefore “readily accommodate” BNPL credit.

“The rules in the National Credit Act are meant to be comprehensive and flexible. While there may need to be some fine-tuning of the framework to address issues specific to BNPL credit, this does not provide an invincible barrier to regulation,” Mr Blyth said.

‘An entire segment of the credit market that is invisible to other banks and lenders’: USYD

The Financial Rights Legal Centre CEO Karen Cox welcomed the support provided by industry bodies like ARCA for the regulation of BNPL products, flagging that the current lack of regulation can cause harm to the most vulnerable and leave limited options for recourse.

Indeed, the University of Sydney Business School has found that people who own multiple buy now, pay later (BNPL) accounts are more likely to be “vulnerable high-risk borrowers”.

By analysing the transaction data of 819,415 BNPL consumers from a major Australian financial institution in 2021, the researchers found that about 40 per cent of BNPL users have more than one account.

Of these, the study found that they were more likely to:

• Be from a lower socioeconomic area
• Be receiving government benefits
• Have a higher credit card utilisation rate
• Use more personal loans

Multiple BNPL users are therefore likely to represent higher credit risk for financial institutions and would be more likely to experience financial stress, it concluded.

Dr Andrew Grant, senior finance lecturer at the University of Sydney Business School who co-authored the study, stated: “Essentially, we have an entire segment of the credit market that is invisible to other banks and lenders, which is problematic. So, what people under financial stress tend to do is get to their credit limit, and then they sign up for a Buy Now Pay Later product to get access to more funds. 

“They’re already in financial stress and then they get more credit.

“My previous research has found people have a payment hierarchy, so when they experience financial stress they’re more likely to default on a credit card or personal loan before a Buy Now Pay Later service in order to keep a line of credit open.

“But these services have so far only existed in a low-interest rate environment in Australia. Now that interest rates are rising and inflation is biting, we can expect to see more people experience financial difficulty in the year to come.”

Study co-author David Grafton, a financial consultant and honorary associate at the University of Sydney Business School, said BNPL should therefore be subject to the same regulation as any credit product.

“Most people use Buy Now Pay Later well. Our study found 77 per cent were at very low to low risk of missing three or more payments over the next 12 months. For them, the customer experience is great, so we don’t want to throw the baby out with the bathwater,” Mr Grafton said.

“But there’s a significant proportion, particularly those that have multiple accounts, that are in serious financial difficulty. A bit over 10 per cent of users are at high risk and having access to unregulated credit, which is only going to make their position worse.

“For the benefit of lenders and consumers, buy now pay later needs to be regulated in line with any other credit product on the market.”

The calls came as Treasury digests the feedback from stakeholders on the options paper, which will inform a government decision on the future regulation of BNPL in Australia.

Several other players, including personal lender MONEYME and the Mortgage & Finance Association of Australia (MFAA), have also released their submissions to the Treasury consultation. Both MONEYME and the MFAA backed the full regulation of the BNPL sector while the Commonwealth Bank of Australia (CBA), which has its own BNPL product, has instead suggested there should be an “enhanced” version of option 2.

[Related: Lenders back BNPL regulation push]