ASX buy now, pay later (BNPL) companies such as Zip Co Ltd (ASX: ZIP) are under fire from consumer advocacy groups who think the unregulated sector harms vulnerable Australians.
Leading consumer advocacy group Choice is campaigning for the government to 'close lending loopholes', including forcing BNPL companies to adhere to the national credit act.
Choice accuses BNPL companies of "taking advantage of people doing it tough".
As reported by abc.net.au, the Minister for Financial Services, Stephen Jones wants to change BNPL regulation this year.
An options paper is on the table, and the government is taking public submissions now.
What would new regulation look like for ASX BNPL companies?
In summary, the options paper proposes three models for BNPL regulation:
- A tougher industry code, including an affordability test for each customer
- Including BNPL providers under the Credit Act but tailoring their responsible lending obligations
- Applying the Credit Act to the BNPL sector in full.
Choice and 21 other consumer groups are advocating for option three.
ASX BNPL company Zip is pushing for option two, as outlined in its submission to the government.
What's the debate all about?
The crux of the regulatory debate is that BNPL providers are currently not classed as credit providers because they do not charge interest on their customers' layby purchases. Instead, they charge the merchant a fee. Merchants are willing to pay because BNPL helps them generate more sales.
This lack of classification (or 'loophole', according to Choice) means ASX BNPL companies do not have to adhere to the National Consumer Credit Protection Act nor the National Credit Code like credit providers do.
For example, banks sell credit cards, so they are classified as a credit provider. They have to do a bunch of checks before approving customers for credit. That's what those long application forms are about. Under the Credit Act, they also have to hold a credit licence and meet responsible lending obligations.
If ASX BNPL companies and other BNPL providers had to do the same, it would reduce the relative ease they have in recruiting customers today, and it would add more costs to their operations.
The government wants more regulation because it is concerned that people who can't afford credit are racking up debts with multiple BNPL accounts.
Choice is far more direct about its concerns, saying BNPL products "exploit loopholes in Australia's credit law to sell people into unaffordable debt". It says BNPL companies are "causing serious economic and social harm to people, families and households across the country".
BNPL companies have argued that because they don't charge interest, and because most transactions are very small in nature — typically less than $2,000 — applying the Credit Act in full would be overkill.
Minister Jones says he doesn't want to destroy ASX BNPL companies and other BNPL providers:
We want to ensure that we don't, with new regulation, smash an industry which is providing great competition.
But we do want to ensure that we've got the guardrails in place which will get the balance right between innovation, competition, credit provision and consumer protection.
As we've previously reported, new regulations incorporating credit checks might affect some ASX BNPL companies more than others.
For example, because Zip already does credit checks voluntarily, chair Diane Smith-Gander AO thinks new regulations might give them an advantage.
At last year's annual general meeting, 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.
