SYDNEY, May 22 (Reuters) – Australia said it will regulate buy-now-pay-later services as a consumer credit product under new laws that force BNPL providers to carry out background checks before lending in one of the world’s toughest regimes. For the startup sector.
The move would put Australia behind Britain among countries that have sought to regulate companies such as Jack Dorsey’s Black Inc ( SQ.N )-owned Afterpay, Zip Co and BNPL under the watch of the Australian Securities and Investments Commission (ASIC). A fixed loan product.
BNPL companies typically offer instant interest-free short-term loans with minimal credit checks that spread payments over weeks or months, and cash-strapped people take out loans, sometimes using more than they can afford.
BNPL providers have so far been exempted from consumer credit regulation due to the absence of interest charges, and the sector has seen its business boom amid an online shopping frenzy fueled by Covid-19 incentives and ultra-low interest rates.
But as Australia battles high inflation and growing concerns about repayments, which are now at a 30-year high, Australia’s centre-left Labor government says BNPL should be treated as a loan because it has the same impact on borrowers.
Speaking in Sydney on Monday, Financial Services Minister Stephen Jones said: “PNBL looks like a loan, it acts like a loan, it has credit risks.”
“Our plan does not stop the use of safe, prudent BNPL and prevents lending to the unaffordable.”
Home to about a dozen listed BNPL providers, Australia has about 7 million active BNPL accounts, resulting in a 37% increase in transactions to A$16 billion ($11 billion) in 2021-22, the data shows.
Retail industry statistics show that by 2022, 63.8 billion Australians will shop online, with 26% of Australians using BNPL to make purchases.
BNPL companies earn the bulk of the money by charging merchants a percentage of sales revenue, instead of paying shoppers to them. They charge borrowers late fees but say they encourage timely repayment with the promise of higher loan limits.
BNPL companies say they closely monitor borrower activity, but the new Australian law requires them to run credit checks before lending, inform customers when credit limits are increased and follow statutory dispute resolution processes.
The government will publish draft legislation for consultation later this year and the bill will be introduced in parliament by the end of the year.
‘Strong First Step’
An Afterpay spokesman said the change was “a strong first step in the development of a fit-for-purpose buy-now-pay-later regulatory framework”.
Zip chief operating officer Peter Gray said the change would mean “business as usual” as the company already complies with Australian credit legislation for some products.
A spokesperson for ASIC, the regulator which argued for tougher possible regulation of BNPL, was not immediately available for comment.
The Australian Finance Industry Association said it hoped its BNPL Code of Conduct would form the basis of self-regulation, saying it would “continue to collaborate with the government on future regulatory details”.
Shares of Australian-listed provider PNBL were mixed in the mid-session as investors digested the largely expected regulatory development. Locally listed shares of afterpay owner Block fell 1.5%, while shares of largest private BNPL provider Zip fell 5%.
“The buy-now, pay-later business model is still a structural growth model,” said Morningstar analyst Shawn Lehr.
“You end up in a situation where everybody suffers, but your competitors suffer even more, and the demand is still there,” Lehr added.
Andrew Grant, a finance lecturer at the University of Sydney Business School, said the regulations should help create transparency for lenders in the industry without harming the majority of users who have had a good experience with PNBL products.
($1 = 1.4743 Australian dollars)
Reporting by Renju Jose in Sydney; Editing Lincoln Feast
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