Stricter Buy Now Pay Later Regulations to Protect Consumers

Are you a buy now pay later (BNPL) user? Or have you considered these services as a way of purchasing essential and non-essential items?

BNPL services can be a handy financing tool, allowing you to pay off the cost in interest-free instalments. However, they can put you at risk of serious financial problems if you commit to more than you can afford.

BNPL Now Defined as Credit

Until recently, BNPL providers were exempt from consumer credit regulations, including credit checks, which left users vulnerable to unmanageable debt. The Albanese Government has introduced new legislation to bring BNPL under the National Consumer Credit Act. If passed, this legislation will require BNPL providers to hold an Australian credit licence and conduct affordability checks, regulating them similarly to traditional credit providers like credit cards and personal loans. BNPL operators would then need to assess whether their products are suitable and affordable for customers.

As of early October, this legislation is still in the proposal stage and must go through the parliamentary process before becoming law. This involves review, debate, and potential amendments in both the House of Representatives and the Senate. Until the legislation is officially passed, BNPL providers can continue operating without these affordability checks and licensing requirements, allowing them to maintain their current practices.

By aligning BNPL with consumer credit laws, the government aims to offer better protection for those who may be financially vulnerable, addressing findings that BNPL users often take on multiple accounts, leading to debt spirals.

The New BNPL Regulation

Following a review process, the government has moved forward with a definitive approach to regulating BNPL providers. The legislation introduced by the Albanese Government will bring BNPL under the National Consumer Credit Act, which means;

• BNPL providers will be required to hold an Australian credit licence, subjecting them to similar regulations as other credit providers, like credit cards and personal loans.

• Responsible lending obligations will be enforced, including affordability checks to assess whether BNPL products are suitable and affordable for consumers.

• A new ‘low-cost credit’ category has been introduced under the Credit Act to reflect the lower risk and cost of BNPL compared to other credit products, aiming to strike a balance between consumer protection and maintaining access to small amounts of credit.

Previously, the Treasury had considered three options, ranging from an industry-specific code with limited oversight to full regulation under the Credit Act. However, the government has now opted for a comprehensive approach that applies standard consumer credit protections to BNPL products, acknowledging BNPL’s role in the market while addressing concerns over unmanageable debt.

While providers like Afterpay had argued for a self-regulation model that rewarded timely repayments and imposed penalties for late payments, they now face increased oversight. This new legislation will require them to integrate affordability checks into their systems, ensuring that consumers are better protected from debt traps.

BNPL’s Current Customer Pull

In a speech at the Responsible Lending and Borrowing Summit in May 2023, Assistant Treasurer Stephen Jones noted that Australia now has around 7 million active BNPL accounts. According to him, the average consumer makes 18.2 transactions per year, with an average transaction amount of $136.

According to Finder, BNPL adoption surged to an all-time high of 49% in July 2022 but has since returned to more typical levels, with 41% of Australians reporting use of BNPL services in the six months to August 2024. Younger generations are particularly drawn to these services, with 57% of both Gen Z and Gen Y using BNPL. However, the number of Australians paying BNPL late fees has increased, rising from 5% in January 2020 to 7% in July 2023.

Protection From Unmanageable Debt

While it might seem that new regulations on these products will restrict your buying options, they’re actually only going to limit the use of buy now pay later for customers who can’t afford to use it.

This is a good thing, as it means you’ll be better protected from getting into a situation where you can’t manage your debt.

Things to Think About Before You Use BNPL

If you’re currently using buy now, pay later or are considering using it, it’s important to consider the following:

• You Might Pay More - While BNPL is often interest-free, providers make money through fees. Missing a payment can lead to costly late fees, making your purchases more expensive in the long run.
• It’s Easy to Overspend - BNPL can make impulsive buying tempting, as it breaks down costs into smaller payments. Keep in mind the full amount you’re committing to, especially if you’re managing multiple BNPL accounts, to avoid spending more than you can afford.
• Debt is Still Debt - Just because it’s packaged up differently, you’re still taking on debt when you choose buy now, pay later – and debt is never a good idea for non-essential purchases
• Impact on Your Credit - Missing BNPL payments can hurt your credit score, which can make it harder to access other types of credit down the line. If you’re managing multiple payment plans, stay organized to avoid potential credit issues.

For more information, take a look at our buy now pay later dos and don’ts.

To help ensure you’re making informed decisions when using BNPL, here are some practical tips to follow:

• Compare Providers to Find The Best One For You - Check the fine print
• Stick to Only One Account - Multiple can make managing repayments harder
• Create a Budget - Figure out what you can afford. You can use our handy budgeting tool to help you
• Set Monthly Payment Reminders - Don’t end up paying late fees

Buy Now Pay Later Regulation a Positive

As the new regulations take effect, BNPL will come with more robust consumer protections. This is a positive step, especially for those who may be financially vulnerable, as it helps prevent them from taking on unmanageable debt.

While BNPL isn’t inherently negative, it does make it easier to spend on non-essentials. Make sure you consider the potential long-term impacts before deciding to use it.

If you’re experiencing financial difficulties and relying on BNPL to manage day-to-day expenses, get in touch with our team of specialists today on 1800 534 534 for support, advice and to discuss your options.