Stricter Buy Now Pay Later Regulations on the Cards

It Might not be so Easy to Access BNPL in the Near Future

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. But, they can put you at risk of serious financial problems if you commit to more than you can afford.

To date, BNPL providers have been exempt from consumer credit regulations, including credit checks, putting users at risk of unmanageable debt.

To curb the risk, the government published a paper on 21 November proposing change. But what is the government’s proposed buy now, pay later regulation, and what would this mean for the industry and you as a consumer?

BNPL currently not considered credit

Many BNPL providers, including top players Afterpay, Humm and Klarna, are members of the Australian Finance Industry Association (AFIA), which has an enforceable code of practice.

The code includes having limits on how much they can be paid in late fees, internal dispute resolution processes and programs to help customers in financial hardship.

However, because buy now, pay later providers in Australia charge nothing for credit, including interest, they’re not considered traditional credit, which is why they don’t fall under credit laws.

Instead, BNPL providers rely entirely on revenue from retailers and on the fees of consumers who miss a repayment. To manage the risk, they only offer small balances – typically up to $2,000. They also monitor user repayment performance.

They don’t need to do background checks, so signing up is easy, and company costs stay low. But this means people with poor credit history can take advantage of BNPL, even though it may be financially harmful to them.

The proposed BNPL regulation

The government’s buy now pay later regulation paper published by the Treasury puts forward three options for discussion for regulating buy now, pay later providers:

1. Develop a compulsory industry-specific code for the BNPL sector without the need for an Australian Credit Licence. This would be supplemented by an affordability test legislated under the Credit Act.
2. Bring the BNPL sector under the Credit Act, applying a tailored set of responsible lending obligations.
3. Bring the BNPL sector under the Credit Act, applying similar rules to those for credit cards and other loan products.

Buy now, pay later providers, including Afterpay, have until 23 December to respond to the discussion paper.

Afterpay has argued that its current system of rewarding timely repayment with credit limit increases and punishing late payments gives a more accurate reflection of a shopper’s ability to service debt than credit checks.

They also want to ensure that new regulations don’t make it harder for them to deliver their pro-consumer product.

BNPL’s current customer pull

According to the Reserve Bank of Australia’s Payment System Board, Australia had approximately 7 million active buy BNPL accounts in the 2021/22 financial year and $16 billion in transactions – up around 37 per cent year-on-year.

This is reported to have resulted from an online shopping frenzy brought on by the COVID-19 stimulus payments, combined with ultra-low interest rates.

However, due to the current economic conditions and rising interest rates, it looks as though interest in BNPL products is decreasing as people look to cut unnecessary spending – a trend that shows, as consumers, we’re being financially savvy.

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 BNPL

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

• You still pay more - Even though you’re not paying interest like a credit card, you’ll still pay more than you would have upfront for your purchases. This is how BNPL providers make their fees.
• It’s easy to overspend - Because it makes impulsive purchases easy
• Debt is 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
• You can damage your credit - If you miss a BNPL instalment, which can be easy if you’re juggling a few at a time, this can negatively affect your credit score, potentially harming your eligibility for other loans

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

Things you should do before you BNPL include:

• 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

Whatever the outcome of the buy now, pay later regulation change, from our perspective, stricter measures will only be a good thing. They will help people who are already struggling financially from taking on more debt they can’t afford.

BNPL isn’t a ‘no’ from us, but it does create spending temptation, especially on non-essential items. So make sure you give it careful consideration before you say “yes” to paying by instalments.

If you’re currently experiencing financial problems and relying on debt such as BNPL day to day, get in touch with our team of specialists today on 1800 534 534 for support, advice and to discuss your options.