The Zip Co Ltd (ASX: ZIP) share price is screaming 18.5% higher today to 83 cents at the time of writing.
By comparison, the S&P/ASX All Ordinaries Index (ASX: XAO) is down 0.3%.
There is no company news from Zip today. However, its competitor Sezzle Inc (ASX: SZL) has released a positive business update that is sending its share price northwards by 15.8%.
Given both companies operate in the burgeoning buy now, pay later (BNPL) sector, the Zip share price is likely riding on the coattails of Sezzle's success today.
Meantime, there is a potential headwind on the horizon.
The BNPL sector is currently waiting for the federal government to release an options paper detailing three proposed regulatory models for BNPL service providers.
It's due to be released any time now, and there may be implications for the Zip share price. (Not to mention the share prices of pretty much every other listed BNPL provider, too.)
Let's recap.
Will regulatory changes kill the Zip share price?
Regulatory risk has been an issue for BNPL providers for a few years now — and not just in Australia.
You see, at the moment, BNPL providers are not considered credit providers. This means they are not subject to the more rigorous regulations that the banks are. They're not classed as credit providers because they don't charge interest on their customers' layby purchases.
The banks see it differently, claiming BNPL providers are providing credit services and should be required to adhere to the same regulatory code.
Most BNPL providers have fought back and it's in their interests to do so, given thorough credit checks would likely slow down the customer recruitment process for them.
But as we've previously reported, new regulations incorporating credit checks might not affect Zip much — if at all — because it already does them voluntarily.
This is a key operational difference between Zip and other BNPL providers like Afterpay.
Zip CEO says they're ready for new regs
At Zip's annual general meeting on 3 November, CEO Larry Diamond said the company was ahead of the curve.
Diamond said:
… we are well positioned for any potential change to the regulatory landscape. Zip is supportive,
and always has been, of simple, fit-for-purpose regulation. Our first credit product, Zip Money, is already regulated under the National Consumer Credit Protection Act (NCCPA) and we conduct identity, credit, and affordability checks on customers.
Zip chair Diane Smith-Gander AO said greater regulation could even be an advantage for Zip.
Smith-Gander said:
Responsible lending and genuine care for the consumer is in our DNA, reflected in our practice of conducting credit and affordability checks on our customers. Given this approach, this may give us an additional operating advantage should regulation develop across our core markets.
If the proposed new regulations in the options paper are tougher than expected, the Zip share price will likely come under pressure.
Fellow BNPL shares like Block Inc CDI (ASX: SQ2) and Sezzle will likely feel it, too, as investors generally perceive greater regulation to be disruptive and costly to business operations.
Meantime, Sezzle's business update today revealed an 18% increase in its income year-over-year.
Sezzle aims to achieve profitability in 2023, just like its former suitor Zip.
The two companies called off a proposed merger earlier this year.
