Over the past decade, Buy Now Pay Later (BNPL) services such as AfterPay and Zip Pay have become synonymous with offering consumers a sense of improved convenience and flexibility when it comes to payment options. According to the Australian government, these services are now so popular that they add as much as $18.4 billion to our GDP and support more than 120,000 jobs.

Despite their popularity, the absence of regulations in the BNPL industry has raised concerns about the potential financial risks that these services can have for consumers. This week, the Government responded to these concerns by announcing draft legislation that will establish BNPL as a form of credit, requiring providers to comply with existing credit regulations.

Understanding the proposed legislation

Currently, BNPL operates outside the regulatory framework applied to traditional credit products, leaving consumers vulnerable to unfair lending practices. If passed, the legislation will extend regulatory oversight to BNPL providers, ensuring that consumers receive adequate protection while preserving the flexibility and benefits that these services provide. While this will directly impact the BNPL providers themselves it will have flow-on impacts for consumers and retailers who offer BNPL services too.

Under the draft legislation, BNPL providers such as Afterpay and Zip Pay would be required to obtain an Australian Credit Licence and adhere to existing regulations under the Credit Act. This would mean they would be obligated to remain compliant in several key areas, including categorising BNPL as a low-cost credit contract, conducting a form of responsible lending checks akin to banks (although not as onerous), and considering the financial vulnerability of consumers.

While the draft legislation isn’t expected to be presented to Parliament until later this year, there is no doubt that the proposed regulations are a step in the right direction for such a popular financial service.

What does it mean for retailers?

If passed, only time will tell what these regulations will mean for retailers who currently offer BNPL payment options. While the legislation will not affect them directly – it will be the BNPL providers themselves who must maintain compliance – it’s possible that the changes could potentially reduce the number of consumers who are eligible to use BNPL services. 

With that being said, enhanced consumer protections may serve to enhance the credibility of BNPL products, attracting a broader customer base. Currently, Australia has the highest levels of distrust of BNPL, with 33% of consumers generally distrusting these services. It’s possible that with greater industry regulation, consumers may see BNPL as a more legitimate and trustworthy form of payment, similar to credit cards or personal loans.

Enhanced consumer protections also provide greater assurance that consumers who are taking on BNPL credit can afford to repay it; which reduces the risk of poor decisions being made (and flow on costs being passed to retailers). 

How will it affect shoppers?

The implementation of BNPL regulations means customers will undergo more rigorous credit checking when applying for these services – which is a great thing, both for the industry and for consumers themselves. By more thoroughly assessing the financial background of their customers, BNPL companies can ensure that consumers aren’t exposed to unnecessary financial strain due to over-commitment to BNPL (and other credit) products. 

Ultimately, while the changes may limit the number of people eligible for BNPL services and impose additional wait times and application requirements, these measures promote responsible borrowing and financial inclusivity. 

The future of Buy Now, Pay Later

There is no doubt that BNPL has been a positive innovation in the credit market by introducing flexible and efficient ways for consumers to obtain credit. Our recent CreditSmart.org.au research showed that 81% of Australians currently possess at least one credit product, with Buy Now Pay Later (BNPL) services being used by 22% of Australians.

While BNPL services offer convenience and flexibility, it’s crucial for consumers to recognise that they essentially function as a form of credit. Therefore, it’s imperative to consider the potential long-term impact on financial health before opting for such services.

As an industry association dedicated to making credit more visible and accessible, Arca sees the proposed BNPL legislation as an important evolution of this product.

Looking ahead, Arca is hopeful that the draft legislation will pave the way for BNPL providers to participate in comprehensive credit reporting (CCR), which has revolutionised credit decisioning and management in traditional markets. Although not mandated by regulations, embracing CCR would allow BNPL providers to make informed credit decisions based on customers’ payment histories. 

Importantly, it would also empower consumers to showcase their creditworthiness. If BNPL providers were to participate in CCR, consumers could use their BNPL history to demonstrate to lenders their ability to manage and pay off credit products, which in turn could lead to broader financial opportunities. 

The advent of BNPL services demonstrates how growth and innovation is possible for the credit industry. As our world evolves, however, it’s essential that our regulatory framework evolves with it, ensuring that these necessary legal protections foster a fair and resilient financial ecosystem.

Elsa Markula is CEO of Arca.