Limit strictest rules to credit products over $5000, Zip says

The co-founder of one of Australia’s largest buy now, pay later companies says a threshold of $5000 should be used to determine which credit products will be bound by the strict obligations put on providers of credit cards and home loans, while smaller credits should face less stringent rules.

Zip Co co-founder Peter Gray said the ASX-listed company was supportive of stronger regulation of the rapidly growing BNPL industry, but warned against making the entire sector abide by the rules that apply to credit cards or mortgages because of the differences in complexity and size.

“Regulation should be fit for purpose, and larger transactions that are repaid over a longer period of time can clearly cause more harm to a consumer,” he said.

Zip chief operating officer Peter Gray.Credit: Rhett Wyman

The federal government is undertaking a review as it prepares to follow countries such as the UK and the US and place tougher regulation on the burgeoning industry. BNPL products have so far been able to go unregulated as they don’t charge interest and therefore are not classified as credit.

In its submission to the government review, Zip has argued that imposing the same obligations on BNPL products as on credit cards and home loans would create a “large impost” on providers due to the cost of undertaking the thorough affordability checks used for more complex financial products.

Zip believes that products that provide larger credit limits over longer terms should be subject to a higher level of regulation, and has suggested setting a threshold for a more scalable approach.

“If, for example, a threshold of $5000 was identified where further ... detailed checks might need to be conducted or a broader analysis of income and expenses, that might be a suitable threshold for that sort of trigger,” Gray said.

In November, Treasury released an options paper inviting input from industry players and stakeholders as it develops a regulatory framework for the sector. The paper posited three options. The first option is stronger self-regulation and affordability tests.

The second would partially bring BNPL under the National Consumer Credit Protection Act, requiring providers to get an Australian credit licence and abide by a tailored version of responsible lending laws. The responsible lending obligations would be scaled to the level of risk of the BNPL product or service.

The third recommendation would fully bring the sector under the Credit Act and make the responsible lending obligations that apply to credit card providers also apply to BNPL operators.

More than a dozen consumer groups, charities and community legal centres have backed the third option, arguing that the other two options would create a “bespoke form of regulation” for BNPL and leave in place a number of loopholes which would continue to be exploited and harm consumers.

In its submission, Zip - which already holds a credit licence due to its origins as a credit provider - argues that while it aims to improve consumer protection, it also wants to ensure BNPL products remain accessible to consumers, and competition and innovation in the industry is not stymied.

It dismissed the third option due to the large impost on BNPL providers of having to conduct affordability verifications by checking one or more sources of financial information including payslips, Centrelink statements or bank statements.

Zip offers two main products - Zip Pay, a BNPL interest-free product with a line of credit of up to $2000 which is not regulated, and Zip Money, a product which provides a line of credit of up to $50,000, which is regulated under the credit act.

The firm already carries out identity and credit checks on all Zip Pay customers, and affordability checks on approximately 90 per cent of Zip Pay customers. Given this, Gray said that if the third option were to be chosen, Zip would only require minimal changes to its operations.

“It would involve slightly more friction at the point of sale when we’re onboarding customers, but we have demonstrated we are able to deliver that in terms of our regulated product,” he said. “It’s more we’re advocating for fit for purpose regulation for the broader industry.”

BNPL businesses such as Zip and rival Afterpay were market darlings last year, but have since been swamped by a wave of negative forces including high bad debts, growing competition, plunging tech valuations and pressure from rising interest rates. Zip’s share price has risen 25 per cent since the start of the year, after falling more than 80 per cent in the last 12 months.

Gray said on Tuesday investors were warming again to BNPL companies going into 2023, with regulation providing the market with certainty, and the bigger providers demonstrating they were able to manage their businesses well during times of volatility.

“[Regulation] provides certainty, gives confidence, it delivers protection for consumers, and it just takes away a lot of the noise that often surrounds the industry that is very focused on a small number of negative outcomes as opposed to the benefit provided to millions of Australians who are fed up with banks and interest and are looking for better and more transparent ways to make their payments and manage their lifestyle,” said Gray.

Zip will deliver its quarterly trading update next week. Gray said the company had made some adjustments to its risk settings given the economic conditions and market volatility, which helped limit losses from credits gone sour.

The Business Briefing newsletter delivers major stories, exclusive coverage and expert opinion. Sign up to get it every weekday morning.