The absence of specific regulations has allowed buy now pay later providers to extend short-term loans to consumers without conducting stringent affordability checks. The easier availability of credit has, therefore, attracted an increasing number of consumers to BNPL products over the last few years, resulting in a high-growth period for providers globally. With more consumers using BNPL schemes to fund their purchases and increase their spending power, BNPL firms also recorded a significant increase in their gross merchandise value and volume.
However, with no specific regulations on borrowing limits and affordability checks, consumers have borrowed more than what they could afford, resulting in a debt trap problem. To protect the most vulnerable set of consumers, regulators have been exploring ways to regulate the growing BNPL sector globally. In Australia, the government proposed three options for regulating the industry in November 2022. Each of the three regulatory interventions proposed by the government reflects a progressively stringent level of regulation and different requirements for BNPL providers.
With these regulatory options proposed by the Australian government, it also asked for inputs from industry stakeholders, before the regulations can be implemented for the growing sector in Australia. PayPal, as part of its submission to the government, stated that the firm supports mandatory credit licenses for BNPL providers and regulations that would require providers to conduct affordability checks for short-term credit above an appropriate threshold.
Zip and Afterpay, two of the other leading BNPL providers in Australia, have supported other options stated by the Australian government. Afterpay, which does not conduct credit checks on customers, has favored the first option. Zip, on the other hand, strongly supports option number two. The firm already conducts upfront credit checks and its product provides consumers with a spending limit, the same as that of a credit card. Furthermore, Zip’s co-founder has stated that a threshold of A$5,000 should be used for placing strict regulations on credit products, while smaller credits should face less stringent rules.
Banking institutions in Australia are also seen to have differing opinion on the best regulatory play for the BNPL industry. Commonwealth Bank, for instance, supports an improved version of the second option announced the Australian government. Notably, the bank has suggested some additional measures, such as including mandatory obligations around credit reporting, along with tighter restrictions on credit limit increases. Westpac and ANZ, on the other hand, are supporting the third option announced by the government in November 2022.
Like PayPal, Westpac, and ANZ, the Australian Securities and Investments Commission (ASIC) has also supported the third option, which calls for the BNPL industry to be regulated under the Credit Act and treating the firms in the same manner as that of credit card companies. In its submission to the government, the Australian Financial Complaints Authority (AFCA) revealed that nearly 4,000 complaints have been lodged by consumers regarding the unregulated BNPL industry.
The Australian government is seeking the right balance in competition, innovation, and consumer protection and plans to have regulations in place before the end of 2023. Implementation of the third option, which will bring the BNPL sector under the National Credit Act, is expected to limit the growth rate of the BNPL industry.
Like Australia, the United Kingdom government has also announced plans to regulate the unregulated BNPL sector in February 2023. The Treasury announced that the proposed regulations would protect 10 million consumers from the debt trap.
Currently, the United Kingdom government is consulting on the draft regulations, which also place stringent regulations on BNPL firms that are advertising their products. The Treasury has given an 11 April deadline for submissions and plans to implement the regulations before the end of 2023.
While these regulatory proposals are expected to drive more sustainable growth for the global BNPL market, the regulatory clampdown is also projected to have a short-term growth impact on certain BNPL providers, such as Afterpay, who have driven their growth by not conducting affordability checks and extending credits to an increasing number of the consumer base.
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