ASX-listed buy now, pay later (BNPL) shares are squarely in focus today as the government announces new payment system reforms.
The fear of regulation has long plagued the BNPL sector since Afterpay Ltd (ASX: APT) entered the scene in a meaningful way in 2017. Early on, traditional banks argued it wasn't a level playing field as the interest-free instalment offering curbed the definition of credit.
Now, the booming BNPL industry looks set to be caught in the crossfire of the government's latest reforms.
Payment systems regulation gets 21st century refresh
A growing trend in Australia — and much of the world — is payments being made through and being facilitated by big tech companies. This is a world away from what payments used to look like 25 years ago. Yet, the current governing regulation is the Payment Systems Act 1998.
A number of policy reviews have recommended modifications to the regulation to encapsulate current trends. This includes the involvement of ASX-listed BNPL shares, cryptocurrency, and international tech giants in Australia's financial system.
To do this, Treasurer Josh Frydenberg will broaden what defines a payment service in Australia through new legislation next year. As a result, big tech and BNPL companies are expected to be treated equally under the umbrella of payment systems.
Furthermore, the change comes at a time when digital wallets are taking a large share of transactions in Australia. Presently, there is more than 5 million active buy now, pay later accounts in Australia. Remarkably, around 20% of all online retail transactions by value are now conducted via BNPL companies.
The Treasurer's move to encompass ASX-listed BNPL shares and other fintechs under the new definition is for two purposes. Firstly, it will create a more level playing field for the major banks that have plowed capital into Australia's payment infrastructure, only for international tech companies to make use of it at no cost.
Secondly, it will give more power to regulators to address concerns of a destabilised financial system at the hands of digital payment companies.
Challenging conditions for ASX-listed BNPL shares
The past 10 months or so have been fraught with challenges for the likes of Afterpay and Zip Co Ltd (ASX: Z1P). More recently, ASX-listed BNPL shares came under pressure following Financial Counselling Australia (FCA) raising the alarm on the sector.
On Monday, the FCA called upon the Australian Government to review the framework under which BNPL companies operate after it reported a surge in people in financial distress using BNPL services. The organisation found 84% of its surveyed counsellors reported that more than half of their clients had BNPL debt.
ASX-listed BNPL shares such as Afterpay and Zip have underperformed the broader S&P/ASX 200 Index (ASX: XJO) in 2021. The payment companies have fallen 16% and 10% respectively since the beginning of the year. Meanwhile, the benchmark index has gained 10%.
Despite concerns about what it could mean for the industry, BNPL shares are in the green on Wednesday morning. At the time of writing, Afterpay and Zip are up 4% and 9.9% respectively.
