How the buy now, pay later changes could affect you

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Financial Services Minister Stephen Jones’ move to regulate Afterpay, Zip and other buy now, pay later players will belatedly remove a gaping loophole that helped this industry enjoy rapid growth.

That’s sensible, but we still don’t know the answer to a fundamental question: how far will these companies need to go in checking whether a loan is suitable for a customer?

The government is regulating buy now, pay later products.Credit: Louie Douvis

For the buy now, pay later industry, the regulatory changes announced by Jones on Monday look manageable. While they could dampen growth, and in some cases introduce “friction” into near-instant lending processes, the approach sketched out by Jones is hardly a shock. Moreover, these issues are dwarfed by the more existential questions of whether this industry can prove it has a profitable business model.

As buy now, pay later operators such as Afterpay have taken off over the past decade, the question of regulation has never been far away. Consumer groups and bank competitors repeatedly warned that the fintech upstarts were exploiting a loophole by lending money and yet not technically providing credit under the law.

Buy now, pay later companies could do this because they do not charge interest, instead allowing customers to borrow money and pay it back over interest-free instalments.

But this distinction always looked tricky, and the sector is now far too big for the government to ignore. Jones points out there are now 7 million active buy now, pay later accounts in Australia, and he highlights anecdotes of people opening a number of accounts and borrowing far more than would be possible on a credit card or payday loan.

In response, he’s regulating buy now, pay later as a form of credit, but there’s a twist. The government is pursuing a middle-ground option that won’t go as far as the rules imposed on banks when they lend money via credit cards, or personal loans.

So, what difference will this make to consumers?

First, buy now, pay later firms believe these changes will require them to conduct credit checks on prospective customers via a credit bureau (some already do this). That should help reduce the number of vulnerable customers getting into financial difficulties after taking out more than one buy now, pay later account. But importantly, a credit check is not the same thing as checking if a customer can afford the loan.

Second, buy now, pay later firms will need to comply with responsible lending obligations – meaning there must be some sort of assessment that a loan is “not unsuitable” for the borrower. But, in a win for buy now, pay later firms, these obligations won’t be the same as for other types of credit. Instead, Jones says the rules will be “scalable”, which could mean smaller loans require a less detailed assessment.

A credit check is not the same thing as checking if a customer can afford the loan.

The logic here is that a buy now, pay later loan of $600 shouldn’t require as much checking of a customer’s financial circumstances as a personal loan of $10,000, for example.

But exactly how this will work in practice is not yet clear. We don’t know how far buy now, pay later firms will be required to go in assessing a prospective customer’s income and expenses, or whether they will be required to do it at all.

These details will be hashed in consultation in months ahead, and Monday’s responses showed how the various parties in the debate are lining up. Consumer groups expressed their disappointment that buy now, pay later was getting special treatment, while the buy now, pay later industry indicated it could live with Jones’ compromise.

For investors, Jones’ moves shouldn’t come as a huge surprise, but if customers must pass more tests before being lent money, it could dampen the sector’s growth outlook. Zip, which had been pushing for the option favoured by Jones, said it would be “business as usual”, though its shares were still down by about 5 per cent.

Afterpay, the biggest local buy now, pay later player, now owned by US giant Block, had been lobbying for a lighter-touch approach, and it may need to add some new steps to its process for signing up new customers. But it said the government’s changes would provide some certainty.

All up, the big buy now, pay later firms appear confident they can handle the changes, and it’s clear Jones doesn’t want to squash what he regards as a “fintech success story”.

But for sharemarket investors, the beaten-up buy now, pay later sector is still a shadow of its former self, after valuations plunged since 2021 on the back of rising interest rates, growing competition from established players, and concerns about bad debts.

Having clarity on regulation helps, but the industry’s bigger challenges remain.

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