A middle-ground option for regulating buy now, pay later has attracted support from the biggest bank and second-largest buy now, pay later operator, as the government prepares to draw up keenly anticipated reform proposals to regulate the sector as credit.

But Treasury is facing a delicate dance to land a palatable model for regulation. Submissions to Treasury show Commonwealth Bank and Westpac are split on the best solution, while consumer groups and Afterpay, the biggest player in the sector, resume a multi-year battle on whether tougher rules are necessary to protect users.