Afterpay and Zip at odds over buy now, pay later regulation

A split is emerging in how BNPL providers will approach proposed regulation, as Afterpay backed the least restrictive model while others said reforms needed to go further.

Block’s Michael Saadat said the regulatory option that gave players a tailored affordability check for customers was the right way for reform to go. Picture: David Geraghty

A deeper split is emerging in how buy now, pay later providers will approach a proposed regulatory clampdown, as Afterpay threw its support behind the least restrictive model while others said reforms needed to go further.

On Monday, Treasury released a long-anticipated paper outlining three regulatory options for the burgeoning BNPL sector. It is seeking consultation by December 23, and hopes to land on a model with supporting legislation in 2023.

The least demanding of three options put forward by Treasury officials would amend the Credit Act to impose an industry-specific requirement for BNPL providers to check that a product is not unaffordable for a person before it is offered to them. Under that option, there would be co-regulation and strengthening of an industry code, but players would not be required to obtain a credit licence.

That’s the model Afterpay – owned by US company Block – is throwing its support behind, while its smaller rival Zip Co says the reforms must go further.

“We certainly do think that option one can deliver a lot of what the government is looking for in terms of balancing innovation and consumer protection,” said Michael Saadat, Block’s head of international policy.

“The government has acknowledged that the buy now, pay later code has been working well, but I think has raised a concern that it doesn’t apply universally.

“Although it covered 95 per cent of the industry when it … first came into force, we had a number of competitors enter the market, including from the major banks and companies like PayPal and they haven’t signed on to the code.

“We can understand that the government is looking for a framework that applies consistently to all operators and we are supportive of that.”

On Monday, Treasury released a long-anticipated paper outlining three regulatory options for the burgeoning BNPL sector. Picture: NCA NewsWire / Dylan Coker

Afterpay is among the players that don’t conduct credit checks in Australia, but it has started to in other markets where regulatory moves are more advanced. The second option proposed by Treasury requires providers to obtain and keep a credit licence and abide by responsible lending rules that will be specific to BNPL, so firms would need to determine if instalment products are unsuitable for consumers. The third option would see BNPL covered by the same rules as products such as home loans, which require a licence and more stringent responsible lending checks.

Zip – which has a licence because it offers credit as well as instalment products and conducts credit checks – is backing the second option as its preferred model.

“We have always held ourselves to higher standards, so we are certainly supportive of options two and three. I believe that option two is most likely the most appropriate with regards to a genuine fit for our particular sector,” said Peter Gray, Zip’s chief operating officer. He said that while he was somewhat supportive of the third option, a line-by-line inspection of consumer expenses didn’t “necessarily deliver better outcomes” for smaller purchases.

Zip chief operating officer Peter Gray. Picture: David Geraghty

Referring to regulatory action in markets including the US and Britain, Mr Saadat said: “No government around the world that has been looking at buy now, pay later products is looking to apply traditional consumer credit regulation to buy now, pay later without applying a proportionate and tailored approach.”

Sources said some larger banks were reluctant to endorse the BNPL code, given evidence of consumer harm within the sector, suggesting the code may be insufficient as a self-regulatory tool.

Brighte – which has BNPL and loan products after obtaining a licence in 2018 – provides funding for purchases such as solar, batteries and home improvements.

Its chief executive Katherine McConnell said she didn’t believe the licence would provide “any greater protections to the customer”. “You would think that with the credit licence and extra checks required, that product would then deliver lower losses or a higher credit score,” she added.

“But in Brighte‘s experience our green loan delivers largely the same outcome as our buy now, pay later product. I believe BNPL is advantageous to customers – and with us it helps with the acceleration of home sustainability.

“The performance across our (credit and payment plan products) is largely the same and I think that’s a great indication that the (Australian Credit Licence) is not necessarily the answer to providing greater protections for customers.” Brighte – backed by Mike Cannon-Brookes – already conducts credit checks.

Brighte chief executive Katherine McConnell. Picture: Jonathan Cami

Assistant Treasurer Stephen Jones on Monday said the BNPL sector should be brought within relevant credit laws.

“We want to ensure that where these products are being offered, they’re being offered safely to consumers and people aren’t getting themselves into hot water,” he said. “We have a template for regulating credit products. It’s the National Consumer Credit Act. We’re minded to bring buy now, pay later inside the National Consumer Credit Act.”

The Australian Retail Credit Association, whose members include credit reporting bodies and banks, said it was in the interests of consumers and industry that all credit information, including BNPL, was “reported and utilised”.

“All credit products and services (including BNPL) should be regulated via a common framework, with the same general obligations, but with sufficient flexibility and scalability to take into account unique product features,” the group said.

The Australian Finance Industry Association said regulation had to be “right-sized” and reflect consumer use.

While the majority of users had no problems, Treasury’s paper highlighted growing risks of harm stemming from BNPL.

“Treasury understands BNPL is being advertised to pay for essentials, such as groceries and utility bills. Many consumer groups and financial counsellors advise the advertising of BNPL products encourages vulnerable consumers to use BNPL, instead of other community support,” it said.