By Rachel Clun
New users of buy now, pay later products will soon have to undergo a credit check and prove their income under stricter regulations for the burgeoning industry.
Buy now, pay later providers including Afterpay, Zip and Klarna will be brought under the Credit Act and face tougher rules in changes Assistant Treasurer Stephen Jones said have been a long time coming.
Buy now, pay later products will be brought under the Credit Act and face tougher regulation.Credit: Marija Ercegovac
“It’s a missing piece of the puzzle. I think it’s an important piece of consumer protection,” he said.
Buy now, pay later products have exploded in popularity since their inception about six years ago, allowing shoppers to immediately take home retail purchases and pay them off in scheduled instalments.
A recent Finder survey found two in five Australians (40 per cent) used a buy now, pay later service in the six months to March, and Gen Z and Millennials were the most likely to use those accounts.
“These are the credit cards for Millennials. Basically, they’re more likely to have one of these than a credit card,” Jones said.
Because buy now, pay later providers don’t charge interest – they instead charge retailers to use their products, and have fees for missed payments – they have until now fallen outside the traditional definition of credit products.
That will soon change. Jones will introduce legislation to parliament on Wednesday to require those providers to hold an Australian credit licence, be a member of the Australian Financial Complaints Authority and have effective dispute resolution processes.
They will also have to comply with responsible lending obligations, which means they will not be able to offer credit to new customers without first checking whether it is suitable.
“For new customers, they’ll have to go through a credit check. Not the same level of credit check that you would if you were taking out a home loan, but an appropriate [one],” he said.
“Has there been a negative credit report through a credit reporting agency? Can you prove to me that you’re earning $80,000 a year? Show us a pay cheque, show a bank statement. That would be the obligation.”
Jones said there would be no change for existing customers, unless something went wrong. Because providers will be required to hold a credit licence under the act, consumers would have access to a dispute resolution process.
Providers will also no longer be able to automatically increase customer credit limits without the consumers’ consent.
Other changes that will come through regulation rather than changes to the act are still in consultation, including caps on late fees of $10 and limits to annual fees and charges.
When first opening consultation on these changes in 2022, Treasury floated three options: a light touch self-regulation approach, an option to treat the products the same as traditional credit facilities, and a middle ground.
The legislation is in that middle ground, creating a new “low-cost credit contract” category for certain buy now, pay later options.
Afterpay co-founder Nick Molnar, speaking on Tuesday before the government released the changes, said it was important to acknowledge the major differences between Afterpay and credit cards.
He said the company had long supported a set of common rules across the industry.
“There’s been a clear recognition [from the government] of not stifling innovation. There’s been a clear recognition that competition in the banking industry is really good,” Molnar said.
Jones said purchases made through buy now, pay later are generally small and the overwhelming majority of people manage their payments well, so the products should not be regulated as strictly as traditional credit cards or loans.
“The things that we’re attempting to do is to ensure that the obligations are no more onerous than they need to be. We don’t want to lock people out of access to these credit products,” he said.
With Clancy Yeates
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