Lenders urged to adopt open banking for BNPL/pay advance oversight

Open banking fintech Frollo has flagged that lenders could “better assess home loan affordability” and “improve their responsible lending practices and how they manage risk” by adopting open banking.

While open banking has been mandatory for banking for more than two years, take-up has been slow. Indeed, several lenders have been chastised for delayed uptake and teething issues.

However, the benefits of open banking could improve several aspects of the mortgage process. Fintech Frollo has now emphasised that providing better oversight of BNPL and pay advance transactions could be one of them.

The call came after Frollo research found that buy now, pay later (BNPL) and pay advance services are growing in popularity among Australias, but that these transactions aren’t necessarily captured in standard credit report checks.

According to the fintech, of the 33,050 people using its money management app, more than two-fifths (43 per cent) had used BNPL at least once. Moreover, the number of people using BNPL and the average BNPL grew each quarter throughout the year. For example, customers were spending an average of $417 on BNPL services per month in Q1, which grew to $426 in Q2, $458 in Q3, and $452 in Q4. 

BNPL users were also found to be 43 per cent more likely to use pay advance services.

Frollo noted that 5 per cent of users had made at least one pay advance transaction in 2022. Indeed, those using pay advance services grew from 1.4 per cent in Q1 to 2.7 per cent by Q4 in tandem with the cost-of-living pressures and interest rate rises.

On average, pay advance customers spent $1,331 on repayments, fees, and penalties in 2022.

Noting the research findings, Frollo’s chief customer officer Simon Docherty commented: “It’s clear from our data that BNPL services aren’t becoming any less important to Aussies, and alongside Pay Advance services, are going to be part of the makeup of the consumer finance landscape for the foreseeable future.

“As a result, there are a few things for lenders to consider. A customer spending $500 per month on Pay Advance services might not be able to afford the same mortgage as someone who doesn’t. So it’s essential to get visibility over this spending to reduce risk and lend responsibly.”

However, Mr Docherty flagged that lenders cannot rely on credit scores to get the complete picture of a borrower’s risk profile as most BNPL debts aren’t registered and most of these services don’t perform credit checks. 

While he noted that both ING and Macquarie recently announced that they would consider BNPL debts when assessing home loan affordability, he said that a broader adoption of open banking would help provide better transparency.

“Open Banking offers a solution for lenders who want to assess home loan affordability better, manage risk and improve their responsible lending,” he continued, flagging that Frollo’s Financial Passport provides an overview of a user’s income, expenses, assets and liabilities including BNPL and pay advance spending.

“Lenders who want to improve their responsible lending practices, and how they manage risk, should consider using Open Banking data for their credit assessments.”

Frollo backs option 2 for BNPL regulation 

As well as outlining the need for better BNPL transparency, Frollo has also recently submitted a response to Treasury’s BNPL regulation options paper.

The paper, which was open to stakeholder feedback until 23 December, was launched after the government noted some of the financial distress faced by BNPL users and sought to “have a look at how to regulate it” and “put some guardrails around it”.

The paper put forward three regulatory options that the government could take:

• Option 1: Strengthening the BNPL industry code and imposing an affordability test
• Option 2: Require BNPL providers to obtain and maintain an ACL, plus introduce modified responsible lending obligations (RLOs) under the Credit Act
• Option 3: Regulating BNPL under the Credit Act with full RLOs

Tony Thrassis, the chief executive of Frollo, told Mortgage Business that the fintech supported option 2 of the three put forward.

He said: “We support Option 2 as it contains several safeguards tailored to BNPL, including a strengthened industry code, excluding exemptions not relating to BNPL and assessing whether credit is not unsuitable for a person. 

“We also see benefits around credit reporting and restrictions on credit limit increases.”

Frollo joins the Commonwealth Bank of Australia (CBA) in backing option 2 while other players including personal lender MONEYME, the Mortgage & Finance Association of Australia (MFAA), and the Australian Retail Credit Association have backed option 3.

[Related: Open banking awareness campaign launches]