It couldn’t have come at a worse time for the BNPL operators whose operations have been hit by high interest rates.
It’s a real step change for a sector that has until now enjoyed optimum conditions to thrive - a regulatory free-for-all and ultra-low interest rates. Without the regulation that forces the BNPL to be classified as credit,operators have been able to sign up new customers with little or no credit checks.
The government is considering new credit laws that will apply to Afterpay and other BNPL players.Louie Douvis
This has meant the addressable market for BNPL is virtually everyone.
Merchants had little choice but to follow customers,who were enticed by a payment method that satisfied the desire for instant gratification and easier budgeting. BNPL has become a durable part of the payments landscape for Australians - and while that won’t change,the economics for the BNPL players will.
To say that BNPL has simply fallen between the regulatory cracks of the Australian Securities and Investments Commission (ASIC),the Reserve Bank and the Federal Government would be a generous interpretation. There was a distinct disinclination from the regulators to have any hand in turning down the music once the BNPL party started.
This ‘Wild West’ approach was justified on the grounds that the industry was too small and onerous regulation would ‘stifle innovation’. Then there was the fact that BNPL operators ‘technically’ didn’t provide credit so didn’t need capturing under the legislation that governed credit.
A Senate inquiry in 2020 into fintechs found there was no need to treat BNPL like credit card providers. Both ASIC and the Reserve Bank took multiple looks at the BNPL industry and were similarly unmoved to regulate,choosing instead to put a pin in it or kick the can down the road.
This is despite increased noise from consumer groups around hardship faced by BNPL customers.
ASIC’s 2020 report found that the total amount of credit extended in the BNPL industry had almost doubled in 12 months and that one in five consumers were missing payments.
Ultimately,the banking industry,which was pushing hard to have BNPL classified as credit,has fought back with products that mimic BNPL features but with credit checks. Most notably,Commonwealth Bank,which has its own BNPL product StepPay available to its customers.
Arguably regulatory tardiness has resulted in some degree of damage having already been done.
The huge increase in the cost of living has already put additional stress on the ability of consumers to pay instalments to the BNPL operators. And there is a raft of anecdotal evidence that people are using BNPL to pay for essentials rather than discretionary products.
Ironically,there could be a spike in the use of BNPL as cash constrained consumers move into the Christmas period. But rising interest rates not only put pressure on consumers,they also squeeze the BNPL operators who have to fund the credit provided to consumers.
Just which legislative road the current government will take to impose regulation on the sector is not yet clear.
Treasury has drawn up three options. The first could only be described as ‘regulation-lite’ - an affordability test added to the existing self-regulation model. On the other end of the spectrum,the $16 billion industry could be brought under the same umbrella as credit cards and the Credit Act.
The market is banking on a Goldilocks decision - the middle ground which would bring BNPL partly into the Credit Act. BNPL players would need to hold an Australian Credit Licence and follow responsible lending obligations,with a sliding “unsuitability test” applied to products.
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