Proposed regulation in BNPL sector could see higher costs for customers

Aussie consumers have saved $102m with BNPL compared to standard credit options. The industry has delivered a ground-breaking payment system that buoys consumer spending, helping to create and retain 99,200 jobs and contributing over $14.3bn to the Aussie GDP.

However, the debate on the BNPL industry has sparked new calls for regulation, threatening the unique model and benefits of BNPL. A recent options paper released by The Treasury argues that the current BNPL model is unsuitable as it permits unaffordable lending.

What do the calls for regulation mean for the industry?

It proposes three recommendations for the industry to make it a fairer space. Some of the conclusions in the report are based on a misunderstanding of BNPL. It isn’t just fun branding, and it isn’t sucking in every vulnerable consumer looking for cheap credit. 54% of consumers use BNPL to manage their cash flow and 48% of BNPL users do not hold a credit card

The high uptake of BNPL as a cash flow management tool highlights the critical role BNPL plays as an alternative to conventional credit with a cost free period of up to 8 weeks, credit cards have annual fees and compounding interest rate charges of around 20% p.a.

One of the options presented in the report asks to strengthen the BNPL code, requiring providers to check that BNPL products are affordable for a person before lending to them. This affordability test would involve using someone’s credit score as a proxy for their credit risk, while income and expenses information could be used to verify riskier borrowers. 

The second option requires BNPL providers to obtain licences and conduct suitability tests under the Credit Act. Requiring BNPL providers to obtain an Australian credit Licence would result in greater hardship provisions, stricter suitability tests, and fee caps for late payment.

It would prevent BNPL companies from increasing spending limits without instruction from the consumer – curtailing the temptation to spiral into higher debt loading. The third option is to regulate BNPL under the Credit Act with full RLOs. In doing so BNPL would be brought more in line with existing credit options, requiring them to comply with all licensee obligations.

Why it is important to trade lightly

BNPL would come under ASIC reporting obligations, Credit Act requirements, and hardship provision among other features. It’s critical that the government takes a nuanced approach to regulating BNPL so that the problems it solves are not eroded by regulation.

Adding more barriers to access takes away the cheapest source of credit available to young consumers and those without a strong credit history. Even though credit cards are regulated, they can legally charge consumers up to 48% pa and have not assisted their users in saving interest costs like BNPL. This is one of the key reasons behind BNPL’s popularity.

Credit defaults over $150 can be reported on a consumer’s credit history. But cheap access to BNPL loans under $150 can be a lifeline for Aussies needing access to credit for essentials. While hardship provisions are a buzzword in the debate around BNPL, its claims are inflated.

According to Australian Financial Industry Association, 4.4% of users had to cut back on essentials to make BNPL repayments. The definitions of “essential” goods and services vary depending on the demographic. While younger users classify entertainment, internet, and putting money into savings as essential, older consumers consider groceries and bills as vital.

If Disney Plus and The Iconic are essential spends for younger consumers who often enter financial hardship, then cutting back sounds much less dramatic. Serviceability should be considered, but it can’t be reactionary to the inflammatory reporting we’ve seen lately. 

These changes align with comments from Assistant Treasurer Stephen Jones, who argued that “Australia’s modern, digitally-enabled economy leads in innovation, and consumer protections need to keep pace. It is a ground-breaking innovation in the payments sector which needs regulation appropriate for the space. There can be no one size fits all approach as it could stifle the benefits that BNPL bring to the market – of which there are many.

Ulrika Lobo is the Director of Sparrow Loans, a private property lender in Australia. Ulrika has nearly a decade of experience in finance, underpinned by an MBA and a Master of Finance. She was also recognised as Western Sydney Women’s Entrepreneur of the Year in 2021 and awarded ‘Finalist’ for Director of the Year in Women in Finance’s 2020 and 2021 awards.

Ulrika Lobo, Director of Sparrow Loans