What could this proposed regulation mean for Zip shares?

The Zip share price is down again today and a new headwind may be on the horizon.

| More on:

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Key points
  • The government is preparing to release an options paper outlining three proposed models for regulating the BNPL sector 
  • If tougher regulation is adopted, BNPL providers say it will make it harder for them to recruit customers 
  • Zip already conducts credit checks, so it could be less impacted by any new rules 

The Zip Co Ltd (ASX: ZIP) share price is down 2.33% in early trading to 64 cents per share. Meantime the S&P/ASX All Ordinaries Index (ASX: XAO) is up slightly by 0.3%.

It's been a shocker of a year for the buy now, pay later (BNPL) ASX share. The Zip share price is down 85% in the year to date. Yikes.

The company is trying to turn things around by abandoning its seemingly growth-at-all-costs strategy.

But there are other headwinds for the Zip share price that are not in the company's control.

One of them is proposed regulation.

A businesswoman faces headwinds, walking in the rain and wind shielding herself with a briefcase.

Image source: Getty Images

What's next for the Zip share price?

According to reporting in the Australian Financial Review (AFR) today, the federal treasury department will soon publish an options paper regarding three proposed models for new regulation of BNPL services.

One model proposes credit checks for all BNPL customers.

This issue has been hanging over the heads of BNPL companies for years. In a nutshell, there is a global debate as to whether BNPL companies should be considered credit providers. This would make them subject to more rigorous regulations.

Currently, they're not because they don't charge customers interest. Many of them do charge late fees but their main revenue comes from merchants.

Shops are motivated to pay providers like Zip for their services because BNPL allows customers to buy things 'on time' but with immediate access to the product or service purchased. This can lift merchants' revenue.

Why are credit checks a problem for BNPL providers?

Basically, it slows down the customer recruitment process. But here's the thing. Any such regulation may not impact Zip as much as other BNPL providers because it already conducts credit checks. Zip has distinguished itself from rival BNPL services like Afterpay in doing so.

But if new regulation is imposed on the industry, Zip shares may get caught up in any negative market response anyway.

According to the AFR, there are three proposed models.

The first is strengthening the existing self-regulatory industry code. The Australian Finance Industry Association (AFIA) administers the code and an independent committee enforces it. The proposal is to make it enforceable by the Australian Securities and Investments Commission (ASIC). 

The second is requiring more detailed customer credit checks on all BNPL loans. This is already in place for large loans but not the smaller ones typical for retail purchases.

The third is creating an entirely new regulatory regime for the BNPL sector.

The government will seek industry feedback on the proposals after the options paper is released.

What's the latest from Zip?

Zip reported its Q1 FY23 results on 20 October. The market responded positively with the Zip share price soaring 13% on the day of the announcement.

Zip reported a 19% revenue increase to $163.2 million.

Zip CEO Larry Diamond said:

We are pleased to deliver another solid set of numbers as Zip resets and moves toward positive cash flow, taking control of our future.

During the quarter we made great progress on our refreshed strategy to deliver sustainable growth, right-size our global cost base and accelerate our path to profitability.

Motley Fool contributor Bronwyn Allen has positions in ZIPCOLTD FPO. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has positions in and has recommended ZIPCOLTD FPO. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

More on BNPL shares

Part of male mannequin dressed in casual clothes holding a sale paper shopping bag.
BNPL shares

How high do UBS and Macquarie think Zip shares will go?

Even after a jump this week, these shares could be a bargain.

Read more »

person sitting at outdoor table looking at mobile phone and credit card.
Earnings Results

Zip Co reports record FY26 earnings and outlines growth strategy

The buy now pay later provider delivered a 45.7% increase in net profit after tax to $116.4 million.

Read more »

Stressed man in an an office with his eyes closed and phone in his hand, with investing graphs open on two iMacs.
BNPL shares

Zip shares are getting crushed: What's gone wrong?

Zip’s 20 August update will test growth, profits, and credit quality.

Read more »

Two people comparing and analysing material.
BNPL shares

Should I buy Zip shares before the end of July?

The market expects profits to rise quickly from here. That creates considerable upside if Zip delivers.

Read more »

Happy man wearing a blue shirt and glasses holding a card and using buy now pay later services to purchase a product on his office computer
BNPL shares

$10,000 invested in Zip shares at the March lows is now worth…

While Zip shares are well down for the year, investors who bought at the March lows are sitting pretty.

Read more »

An older man throws his hands up in excitement as he rides a carnival swing high up in the air.
BNPL shares

Zip shares are going wild. What investors need to know

Zip's recovery is gaining momentum, but the biggest test lies ahead.

Read more »

An evening shot of a busy Times Square in New York.
BNPL shares

Could US expansion send Zip shares soaring further?

The fintech's biggest opportunity may still be unfolding in America.

Read more »

A happy shopper with a wide mouthed smile holds multiple shopping bags up around her shoulders.
BNPL shares

Why brokers think Zip shares could soar 50% or more in FY27

Experts believe Zip's earnings momentum could fuel another major rally.

Read more »