Should BNPL credit be regulated under the Credit Act?

A Government proposal to regulate Buy Now Pay Later (BNPL) products under the Credit Act has recently gained a lot of attention and media discussion. Some commentators have suggested that regulating BNPL under the National Consumer Credit Protection Act (also known as the ‘Credit Act’) will have serious consequences for the BNPL industry, and others that the regulation is vital to ensuring that Australian consumers aren’t financially harmed by BNPL products they can’t afford.

This article sets out the background and will help you sort fact from fiction and bust some myths.

What happens when you use BNPL to buy that new $200 pair of sneakers?

Your BNPL provider pays the retailer directly and when you walk out of the store holding (or possibly wearing) those brand-new sneakers you will owe the BNPL provider $200. Which you’ve agreed to pay back over the next couple of fortnights.

That is, you owe money to the BNPL provider, and you’ve agreed to pay it back over time by regular repayments from your bank account or credit card. Sounds like credit to me.

Remember, rather than paying interest on the purchase - you may be charged fees (including late fees if you miss payments).

The Credit Act protects Australians against the dangers of too much credit

MYTH : BNPL will be subject to the same rules as home loans

FACT: The responsible lending obligations under the Credit Act are already flexible and how they apply to a specific credit product depends on the type of credit. The steps needed to meet the responsible lending obligation in relation to a small BNPL account (e.g. less than $2000) will be a lot simpler than the steps required for a home loan. Likewise, the steps required to meet the obligation for a lower-cost type of credit like a BNPL account will be less than the steps required for a higher-cost payday loan.

What’s important is that the steps – whether simple or more detailed – adequately test if the customer can afford the new credit, whether that is a BNPL account, a large home loan or an expensive payday loan.

Access to credit can be great for many Australians as it can help you buy something today that you can’t afford in one hit, and allows you to pay for it over time.

But credit can also be dangerous if you take out too much. Or take out types of credit that aren’t suitable to you.

That’s why the Credit Act requires all banks and other lenders to be licensed to provide credit to consumers, and to comply with rules that are designed to make sure the credit issued to their customers doesn’t cause harm.

One of the important rules is the ‘responsible lending obligation’, which requires a lender to test whether you can afford the credit when you apply for it.

Those rules apply to all forms of credit, including home loans, personal loans, car loans, credit cards, overdrafts and payday loans.

However, the responsible lending obligation is ‘scalable’, which means that it doesn’t set out the precise steps the lender has to take to assess whether you can afford the loan. The lender can adjust if and how much they lend based on the circumstances. That’s why a lender may ask you for more information about your financial situation – and ask for more documentation when you apply for a home loan compared to, for example, a credit card.

Not quite all credit… BNPL operates in a loophole. Did I say that the Credit Act applied to all credit? That’s not quite right.

BNPL operates in a loophole as the Credit Act doesn’t apply to them. That means they don’t need to be licensed. And they don’t need to comply with the rules designed to keep customers safe, including the responsible lending obligation.

That doesn’t mean that BNPL credit is always harmful to people who use it OR that BNPL providers don’t try to protect their customers from harm.

Some BNPL providers have signed up to a voluntary BNPL code of conduct that sets out some basic rules that those providers have agreed to follow. But that’s not the same as being subject to the Credit Act. The requirements of the BNPL code of conduct are not equivalent to the Credit Act. Plus, there’s a big difference between voluntarily ‘promising’ to do certain things compared to being legally required to protect customers (and being subject to millions of dollars in fines if you don’t).

Why BNPL needs to be subject to the Credit Act

BNPL credit is not bad for everyone; there are millions of Australians who use BNPL credit and pay it off without any problems.

However, evidence is growing that BNPL is causing problems for some Australians, especially those who may already be vulnerable to financial harm, such as people on lower incomes who may even be struggling with their existing debts. Research indicates that 61% of customers who have BNPL accounts (and who generally have lower incomes) are struggling to pay other living expenses. In response to the Government’s proposal to regulate BNPL under the Credit Act, 22 organisations that represent consumers have provided many descriptions of the harm that can happen when people’s use of BNPL goes wrong, as unmanageable debts negatively affect physical and mental health, relationships, and ability to look for work and finish education.

One BNPL account by itself may not cause too much harm but BNPL credit can be disastrous if an already vulnerable customer is allowed to use a buy now pay later arrangement despite limited or no income and substantial existing debt. ASIC research highlights that the compounding debts caused by multiple BNPL accounts can also be seen in the wider community. Nationally, people are cutting back on or going without essentials to service BNPL debt (ranging from 16% of BNPL users with one account to 25% of users with three BNPL accounts), and taking out additional loans (ranging from 10% of users with one BNPL account to 20% of users with three BNPL accounts).

MYTH: Applying for BNPL credit will damage your credit score

FACT: Some BNPL providers don’t currently check your credit report before offering you credit. This means that they don’t know what other credit you currently have, or whether you are struggling to meet your current payment obligations. (Of course, some BNPL providers do check your credit report which helps them to assess whether to issue the credit to a customer – without damaging the customer’s credit score.)

It has been suggested that BNPL providers shouldn’t have to check a customer credit report because they would have to do so every time the customer made a purchase, and that large number of credit enquiries will damage the customer’s credit score. That suggestion is wrong. A BNPL provider would not need to check your credit report for every purchase. They could opt to only check whether the customer is making their repayments on time on their existing credit products when they first take out the loan and then whenever necessary to stop the customer getting into financial difficulty.

Because many BNPL providers don’t check whether a customer can afford a new BNPL account – and they don’t use credit reporting to check whether the customer is making their repayments on time on their existing credit products – they aren’t in a good position to stop the customer getting further and further into financial difficulty.

That is why BNPL credit needs to be subject to the Credit Act. Only the Credit Act will set out a clear and consistent set of rules for BNPL providers, which will help to ensure BNPL credit does not harm already vulnerable Australian consumers.

How will regulation affect BNPL credit?

Regulating BNPL under the Credit Act will help to ensure that this type of credit is made available to Australians who can afford it, but not issued to Australians who will be harmed by it.

It will also ensure that BNPL customers will get the benefit of a range of other protections, including a right to ask for financial hardship assistance if they are struggling with their payments and rules around when a BNPL provider can (and can’t) increase the credit limit of the BNPL account. Importantly, BNPL providers will have to hold a credit licence and, therefore, act ‘efficiently, honestly and fairly’ (which is basically a general requirement to do the right thing by their customers).

Regulation under the Credit Act will not end BNPL credit in Australia. Nor will it mean that you have to provide the same level of financial information and documentation when applying for a BNPL account as you would, for example, when you apply for a home loan. As noted above, the responsible lending obligation is scalable and the BNPL provider has flexibility as to how it will assess whether you can afford the credit.

MYTH: BNPL should NOT be regulated because it’s ‘free’

FACT: The suggestion that BNPL doesn’t cost anything – or is ‘free’ - isn’t right. Many BNPL providers charge account keeping fees. Plus, if you miss a payment you can end up paying default fees. The government regulator, ASIC, found that one in six buy now pay later users (16%) believed they had experienced at least one type of negative impact due to a buy now pay later arrangement. This included becoming overdrawn, difficulty affording essential goods and services (e.g. utilities or groceries), delaying bill payments, and borrowing additional money from family, friends or another loan provider.

In any case, the harm caused by unaffordable credit doesn’t just come from the interest and charges. If you can’t afford to repay a $2000 debt, does it matter whether that debt may become $2050 four fortnights later? Probably not. The most important thing is to avoid lending the unaffordable $2000 in the first place.