The Australian government is to regulate the buy now pay later sector. Specifically, BNPL apps will have to conform with the country’s National Consumer Credit Protection Act 2009. This legislation is designed to protect people that borrow money. In addition, it sets the foundation for professional and ethical standards in the finance industry.

The Australian government flags up consumers opening multiple accounts. In addition, consumers can access more debt than they could access via credit card accounts. The government references research showing that, in late 2022, around 73% of financial counsellors said that clients have missed essential payments or cut back on essentials to pay off BNPL debt.

The government also highlights concerns such as poor quality of dispute resolution and hardship processes. And it has acknowledged excessive fees, poor disclosure practices, problematic marketing practices and unsolicited credit increases.

Once BNPL apps are classified aa credit products, providers will require an Australian credit licence. Moreover, the BNPL apps will require to implement processes to handle dispute resolution and consider hardship claims.

The government says its plans will bring BNPL into line with other regulated credit providers. It will aim to ensure that the regulations are scalable and technologically neutral.

As yet, there is no date set for implementation as new laws are required.

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BNPL Australia: regulation to impact sales – Halverson

Grant Halverson, CEO & MD of payments consultancy McLean Roche tells RBI: “Australia has around 7 million active BNPL accounts. They are used by 3.2 million consumers with A$16bn in sales. That is around 1% of all credit/debit/charge card sales. Users average 1.5 transactions per month with an average transaction value of A$136.

“BNPL customers are more than twice as likely to end up in financial trouble as a credit card customer. But the risk is only half as big as for consumer leases and payday loans. It is unclear if the new regulation covers ‘copycat’ apps using the same legal loophole. Examples include salary advance loans, cash advances up to 62 days etc.

“The Reserve Bank of Australia’s own research shows the potential impact of surcharging with a A$100 sale becoming A$104 or A$106 depending on merchant rates.

“RBA did research in 2020 and if BNPL was regulated,  some 50% of consumers would stop using BNPL, 10% would switch while 40% would continue. Even if these numbers are not right, BNPL regulation will have a significant impact on sales.”

Industry reaction: FinTech Australia welcomes BNPL reforms

FinTech Australia welcomed the Federal Government’s response to the Treasury Options Paper on regulating BNPL in Australia.

Minister for Financial Services Stephen Jones MP stated that BNPL “is a fintech success story”. BNPL provides a “valuable source of competitive pressure on traditional credit products”.

“Buy Now Pay Later is an Australian innovation story. It has been exported around the world, generating competition and consumer choice,” FinTech Australia General Manager, ​​Rehan D’Almeida told RBI.

“We are pleased the Government is taking this approach. Measured regulation is crucial in ensuring trust in Australia’s fintech industry, which is essential for its growth.

“In our experience, the sector, and its founders, endeavour to grow their companies in a responsible manner. Considered regulation sets the bar for the sector and ensures that building trust and enhancing the lives of its consumers remains at its core.

“This framework strikes a balance, designing a scalable and technology-neutral framework that embeds strong and effective consumer protections.

“Crucially, it recognises the distinct differences between BNPL and traditional credit products. It is a vote of confidence in a sector that delivers positive outcomes for customers, businesses and the broader economy.

“As new technologies and digital services disrupt and create better consumer experiences, we need regulatory frameworks that value these innovations, protect consumers, and encourage competition.

“Regulation that is proportionate and fit-for-purpose will ultimately help propel Australia’s digital economy forward and retain the benefits and opportunities this sector generates for our economy,” D’Almeida added.

Australia: credit cards v BNPL GlobalData market data

Credit cards account for 26.5% of cards in circulation in Australia. The number of credit cards decreased from 19.6 million in 2018 to 16.5 million in 2022, a CAGR of -4.2%.

Credit card balances outstanding in Australia fell from A$46.3bn ($33.7bn) in 2018 to A$33.0bn in 2022.

This is a result of banks ditching American Express cards and stringent credit card issuing norms introduced in recent years. The growing popularity of buy now pay later solutions has also impacted the market.

Growing preference for debit cards and consumers becoming more cautious of their spending – especially amid the pandemic – are other factors.

However, credit card payment volume recorded a CAGR of 4.1% over 2018–22.

In addition, credit card payment frequency is rising. Australian consumers used their credit cards 186.7 times per year in 2022 (2018: 135.5 times per year). This represents CAGR growth of 8.3%.

Issuers are now pushing credit card uptake by offering interest-free credit cards, which should encourage further growth.

In a bid to counter the mounting threat from BNPL providers, card schemes have introduced instalment payment services in Australia. For example, in October 2021, Visa introduced its Visa Instalments service. This launched in collaboration with ANZ and payment services provider Quest Payment Systems. When making payments, eligible ANZ credit card holders can choose to pay in instalments across up to 24 months.

And in August 2021, CommBank launched a buy now pay later service called StepPay. This allows users to make purchases in four interest-free instalments. NAB launched a similar service called NAB Now Pay Later in May 2022.

Despite BNPL growth, Australian card usage frequency highest among its peers

The frequency of payment card use in Australia stands at 221.5 in 2022, the highest compared to its peers. By contrast, Singapore lags well behind at 95.2 and South Korea (90.1). New Zealand ranks next (87.7) ahead of Hong Kong (China SAR) (45.0), China (31.8) and Japan (22.1), Taiwan (22.0).

Card penetration in Australia is high with 2.4 cards per inhabitant. Credit and charge card penetration in Australia stands at 68.8 cards per 100 individuals in 2022.

BNPL share price woes

While the fintech sector hails Australian BNPL as an innovation success story, financially the sector remains a car crash.

Block announced in August 2021 that it would acquire BNPL provider Afterpay in an all-stock deal. At the time, Block’s share price valued Afterpay at $29bn. Once the deal closed in January 2022, the Block share price had declined sharply. The deal ultimately valued Afterpay at $13.9bn.

In the past year, Block’s share price is down by 29%. For the year to date, the share price is down by 9%.

In February, Klarna posted its largest ever annual loss. For fiscal 2022, it reported a 47% rise in annual net loss to SEK10.4bn ($1bn). Last year, its valuation tumbled to $6.7bn from $46bn. In Australia, Klarna has made little impact.
Zip’s share price is down by 4% today. In the past year, it is down by 40% and at a current A$0.54 is down by 95% since it peaked at A$12.35 in February 2021.

Sezzle’s share price is down today by 12.5%. Its share price has dropped by 95% since peaking in August 2020. Struggling BNPL outfit Payright is under new management. In 2021/22, it reported revenue of A$16.3m and a loss of A$12.7m. The Payright share price is down by 89% in the past year.

Splitit kicked off 2023 with positive news, agreeing two significant deals. Splitit teamed up with French payments company Worldline in an effort to target the North American market.  In January, it agreed a deal with Alipay, China’s biggest digital payments provider. The Splitit share price remains in the doldrums, down 62% in the past year. Meantime, the Humm share price is down by 41% in the past year. Humm has also exited the UK and New Zealand markets.

Zebit, IOUPay, Openpay failures

Zebit raised A$35m in an IPO in November 2020. It subsequently delisted from ASX last February, its share price having collapsed. It cited low levels of trading liquidity. It said at the time that the costs and administrative burden of remaining listed outweigh any benefits of remaining listed.

Southeast Asian fintech IOUpay placed its parent company IOUpay Limited into voluntary administration with PwC Australia in April 2023.

IOUpay reported the discovery of a significant fraud. It added that it had a “number of outstanding debts” with “no reasonable prospect” of being able to repay them.

In January 2023, Laybuy was delisted from the ASX after its share price dropped to only A$0.026. And in February, Openpay entered administration.

US-headquartered Affirm exited the Australian BNPL market in February 2023. Affirm’s operating losses almost doubled year-on-year for the three months to end December 2022 to $360m. Affirm is now only operating in the US and Canada.

And finally there is the costly failure of Latitude Group’s venture into BNPL. Latitude announced the closure of its BNPL operation in Australia and New Zealand in February 2023.

GlobalData reported earlier this month that BNPL-related social media interactions are also in decline.