Westpac urges Treasury to introduce stringent BNPL regulation for consumers’ sake

The bank has told Treasury BNPL must be strictly regulated to protect vulnerable consumers from severe hardship.

Tough regulation of the buy now pay later industry is required in order to protect against the sector becoming a “financial landmine” for consumers who are struggling with the rising cost of living, Westpac says.

In a submission to Treasury’s consultation on potential BNPL regulation, the bank said it was supporting the harshest option presented to the government by Treasury.

The option would have BNPL covered by the same rules as products such as credit cards and home loans, and would require players to hold a licence and conduct responsible lending checks.

“We support option three as a starting position from which to regulate. This aligns with our view that responsible lending obligations should apply to BNPL products as they have the potential to contribute to financial stress,” the bank’s submission, obtained by The Weekend Australian, reads.

“We also think it is imperative for BNPL liabilities to be included in the credit reporting regime.

“More than 50 per cent of customers who speak to us about hardship solutions also have a liability to BNPL. A common refrain is that BNPL will typically only involve the provision of small amounts of credit.

While buy now, pay later is a convenience for many it’s a trap for the vulnerable. Picture: Dylan Coker

“While this is usually true, an accumulation of BNPL accounts can have a snowball impact for customers in a vulnerable financial situation.”

Westpac cautioned that some BNPL customers were using the service to fund day-to-day expenses, but conceded the sector had changed the credit landscape.

The government called for submissions on a regulatory framework by December 23 after releasing an options paper canvassing three potential models. That follows moves in other markets, including the US, New Zealand and the United Kingdom, to more closely regulate BNPL – and the 3 percentage points in rate rises by the RBA domestically through 2022 in an attempt to cool inflation.

While some BNPL players conduct customer credit and affordability checks, many do not as it is not legally required. BNPL products are lightly regulated because they typically use an exemption for interest-free offerings.

Westpac’s submission also outlined its position on disallowing consumers to pay BNPL debts with credit cards.

“According to the Australian Finance Industry Association’s survey data, around 22 per cent of BNPL users use a credit card to make repayments,” it said.

“This ability to pay off a debt facility with another debt facility is unusual, as it is presently not possible to pay off credit card debt directly through another credit card, due to the potential for this to create a ‘debt cycle’ … the group supports a prohibition on BNPL providers accepting credit cards as a payment method.”

The bank called for the BNPL regulatory regime to correct a “blind spot” in the credit scoring framework and for government to engage with industry to ensure “no unintended consequences” were forthcoming by amending the Credit Act.

The least demanding of the three Treasury options would amend the Credit Act to impose an industry-specific requirement for BNPL providers to check that a product is not unaffordable before it is offered.

Some BNPL players conduct customer affordability checks but many do not. Picture: Gaye Gerard

Under that option, co-regulation and strengthening of an industry code would occur but players would not require a credit licence.

That’s the model Afterpay, owned by US firm Block, initially threw its support behind in November. The company said traditional regulation for loan and card products was unsuitable.

The second option proposed by Treasury requires players to obtain and keep a credit licence, and abide by responsible lending rules that would be specific to BNPL, so firms would determine if instalment products were unsuitable for consumers.

Zip – which has a licence given it offers credit as well as instalment products and conducts credit checks – had initially backed this second option.

Sources told The Weekend Australian on Friday that National Australia Bank’s submission backed Treasury’s second option, and the bank was open to certain elements included in the third option such as mandatory credit score reporting for BNPL, the licence requirement and consistency in hardship provisions.

Westpac’s submission cited internal data which suggested customers who had two or more BNPL accounts were more than twice as likely to be two months past the due date on their credit card payment. The bank noted it was currently possible for an 18 year old to purchase a product for up to $2000 on BNPL without any assessment of their income if they weren’t considered a vulnerable customer.

The Australian Securities and Investments Commission in a 2020 report found 21 per cent of BNPL users surveyed had missed a payment in the previous 12 months and some had cut back on essentials or taken out loans to make payments on time.

McLean Roche Consulting chief executive Grant Halverson has also made a submission to Treasury, highlighting the industry confronted regulation in a string of markets offshore.

Mr Halverson supports the most onerous option and calls for “additional added enforcement items to ensure full compliance by all BNPL apps and copycat providers”, particularly across consumer issues and areas such as anti-money laundering.

“BNPL fintech apps have been totally unregulated for eight years preferring to exploit the regulatory arbitrage,” the submission said. “The Australian sector has … bad debts of 30 per cent of revenue which is four times higher than European BNPLs.”