Consumer groups demand stricter regulation of buy now, pay later loans to reduce harm | Buy now, pay later

Buy now, pay later providers should be regulated like other credit products to protect consumers, given the potential harm caused during the cost-of-living crisis, a coalition of consumer groups has said.

On Monday, the federal financial service minister, Stephen Jones, released a Treasury paper for public consultation. It contained three options for better regulating buy now, pay later (BNPL) services such as Afterpay, including by treating them the same as credit cards under the National Consumer Credit Protection Act.

The less strict options are partially regulating BNPL under the credit act or strengthening existing self-regulation and requiring services to conduct affordability checks.

The Treasury paper said current gaps in BNPL regulation meant Australians using the services risked being harmed. There was the potential for financial stress due to unaffordable loans and selling practices that encouraged the use of BNPL for everyday goods such as groceries.

Consumer groups including Financial Counselling Australia, the Consumer Action Law Centre, and Choice said in a joint statement that partial and self-regulation weren’t enough and those options would result in continued harm.

“Many of the people using BNPL are on low, and sometimes, precarious incomes. While the amounts people borrow may look small, the impact when the debt cannot be paid is not. People are having to forgo other essential items in order to pay their BNPL debts,” the chief executive of Financial Counselling Australia, Fiona Guthrie, said.

“BNPL is credit, plain and simple, so it needs to be regulated in the same way as other credit products to provide people with adequate safeguards.”

According to the paper released by Treasury, there were 7m active BNPL accounts and $16bn worth of transactions in the past financial year, an increase of 37% from the previous year.

A Good Shepherd report found 84% of financial counsellors surveyed said clients with BNPL debt had tried to manage the debt by opening more BNPL accounts. It also found that BNPL services were increasingly becoming an avenue for financial abuse due to the ease with which accounts could be opened.

BNPL products are currently self-regulated under an industry code and are not required to undertake credit checks. However, some companies like Zip – a well-known BNPL product – do.

The managing director of Zip, Cynthia Scott, said the company supported all BNPL services being required to conduct credit checks and would “be comfortable” with any of the three options proposed in the government paper.

But Scott said she believed the least stringent option offered in the paper – which involves strengthening the industry code by including affordability checks – would be fit for purpose.

“The level of exposure [using BNPL services] is considerably lower than that of a credit card so we would anticipate that would be fit for purpose,” she said.

The chief executive officer of the Australian Finance Industry Association, Diane Tate, said the group was not opposed to increasing regulation of BNPL services. The Afia developed the industry code.

“[But] it needs to reflect how things really work and how customers are actually using it,” Tate said. “We will continue to advocate for regulation that is fit for the future.”

Jones told the Nine Network the government wanted to ensure BNPL products were operating safely and within the normal guardrails of other products.

“We’ve heard stories about people saying ‘this is a great innovation, enables me to use my phone like a credit card’,” he said. “But therein lies the trap, it is not a credit card, it’s operating outside the normal credit laws and a lot of people are getting into hot water.”