The big change coming to your buy now, pay later options today

New customers signing up to Afterpay and other buy now, pay later (BNPL) services from today must answer questions about their finances and have their credit files checked before they can borrow money, as the sector is finally regulated as credit.

The changes will mean some new customers will be able to borrow less than those who signed up to BNPL providers before the laws took effect, and consumer advocates welcomed the changes after years of campaigning on the issue.

Buy now, pay later products will be regulated from today.Credit: Louie Douvis

BNPL services allow consumers to purchase goods or services with borrowed money and then repay the loan over interest-free instalments. The product took off with younger customers as an alternative to credit cards, and it is particularly popular for online shopping, including for fashion.

But until now, BNPL was not regulated as a form of credit, and consumer advocates have warned some users were ending up with multiple accounts and repayments they could not afford. The government move to regulate the sector, which was announced in 2023, requires BNPL firms to have a credit licence and comply with existing credit laws.

For Afterpay, which is owned by US giant Block, the changes mean new customers will from now on have to consent to a credit check when signing up. New customers will also have to answer a few questions about their financial situation, including whether they have outstanding debts.

Michael Saadat, international head of public policy at Block, said Afterpay would use this information to determine the spending limits for new customers, compared with its previous practice of giving all new customers a $600 starting limit. Saadat said the process would be completed by Afterpay “virtually instantaneously”.

‘Everybody who wants to have a BNPL account in Australia has probably already got one. It’s like closing the stable door after the horse has bolted.’

Lance Blockley, managing director, The Initiatives Group

“If a customer has a really good credit score and the information they’ve provided in response to those questions means we’re comfortable that we can give them a higher spending limit initially, then we will do that.

“But equally, if a customer has a lower credit score and there’s an indication that we should be giving them a lower spending limit, then we will. In some cases we might decline a customer altogether,” Saadat said.

If existing Afterpay customers want to raise their spending limit, they will also be required to have a credit check.

The company is not required to verify customers’ declared income. Saadat said this reflected the spending limits it offered, and the fact it would be doing a credit check on customers. Afterpay currently has credit limits of $3000, or $4000 for people who request an increase.

Zip, a rival BNPL firm, said its Zip Pay product would now be regulated, while three other products it provides are already regulated. “Zip welcomes the new buy now, pay later legislation in Australia and the introduction of these standards, which are aligned with Zip’s existing practices,” a Zip spokesperson said.

Afterpay, the biggest BNPL firm in Australia, was formed in late 2014. It expanded rapidly, with digital payments surging as online shopping boomed during the COVID-19 pandemic, before being bought by Block in a deal that valued Afterpay at $39 billion at the time.

Banks have also sought to copy the BNPL model, with Commonwealth Bank launching its own product in 2021 and investing in Swedish BNPL firm Klarna.

While consumer groups have long accused BNPL firms of exploiting loopholes in the credit laws, Labor last year said its BNPL laws sought to balance consumer protection, innovation and competition.

The chief executive of the Consumer Action Law Centre, Stephanie Tonkin, said the new regulations would result in a “very light touch” credit approval process for people seeking less than $2000. “I think we will continue to see plenty of buy now, pay later facilities being approved up to $2000,” she said.

Commonwealth Bank launched its own BNPL product in 2021.Credit: Eamon Gallagher

“It’s a very, very common form of credit. It’s always been very accessible. Now we are going to see some level of checking and verification of affordability.”

Afterpay on Tuesday released research it commissioned, which showed its customers had an average credit score slightly lower than that of credit card applicants, but higher than personal loan applicants.

Payments expert Lance Blockley, managing director at The Initiatives Group, said the new regulations would probably have a limited impact on Afterpay and Zip in the short term because the changes applied to new customers, rather than existing customers.

“Everybody who wants to have a BNPL account in Australia has probably already got one. It’s like closing the stable door after the horse has bolted,” Blockley said.

BNPL firms were more focused on signing up more Australian merchants to accept BNPL payments, he said, as well as expanding in the more lightly regulated US market.

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