Credit call: ASX BNPL shares slump as regulation arrives

BNPL providers will soon be regulated under the Credit Act.

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Key points

  • ASX BNPL favourites are suffering on Monday amid news the industry will soon face greater regulation
  • Providers of interest-free, instalment-based, payment solutions are to be regulated under the Credit Act
  • They'll also be forced to assess if a consumer can afford a BNPL loan before allowing the use of their products

ASX buy now, pay later (BNPL) shares are attracting attention today amid news the industry will soon be regulated under the Credit Act.  

That means companies offering interest-free products that allow consumers to pay for purchases in instalments will need to hold a credit licence and will have to assess users' ability to afford such debts.

Right now, stock in iconic ASX BNPL provider Zip Co Ltd (ASX: ZIP) is down 6.6%, trading at 53.8 cents.

Meanwhile, shares in Block Inc (ASX: SQ2) – the owner of former-market darling Afterpay – are slipping 1.63% at $87.75.

Smaller ASX BNPL share Splitit Inc (ASX: SPT) is also down, trading 2.61% lower at the time of writing.

Let's take a closer look at the regulations apparently set to take the industry by storm.

ASX BNPL shares slump amid talks of greater regulation

Financial Services Minister Stephen Jones will outline the government's plan to regulate BNPL providers under the Credit Act this morning, ABC News reports.

"BNPL looks like credit, it acts like credit, it carries the risks of credit," Jones will reportedly tell the Responsible Lending and Borrowing Conference.

Under flagged changes, BNPL providers will need to meet responsible lending obligations. That means they'll have to determine if consumers can afford to pay back BNPL debt before allowing the use of their products.

The industry is currently exempt from major regulation as participants don't charge interest.

News of the changes comes on the back of a Treasury paper released in November 2022.

It put forward three suggested regulatory paths for BNPL products, with the government apparently taking the middle ground. It's gunning for more than an affordability test but not as far as to regulate providers like credit card providers.

ABC News quoted Jones as saying:

The plan will protect people from the spirals of harm that unregulated, unrestricted lending can cause.

Simon Docherty, chief customer officer at Frollo, said recent research by the fintech found usage of BNPL services has jumped 25% year-on-year. Meanwhile, one in four users has resorted to using a credit card to pay off BNPL debt.

How much such changes will impact ASX BNPL shares will likely vary between providers. Zip, for instance, already holds a credit licence and conducts affordability tests on consumers in Australia, as my Fool colleague Bernd reported last year.

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

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