Regulation is coming for the buy-now-pay-later scam — but will it be enough?

After years of indulgence by policymakers — including the Reserve Bank and the Australian Prudential Regulation Authority — the buy-now-pay-later (BNPL) sector in Australia is finally facing regulation after the penny dropped that a credit service pretending not to be one was a deeply flawed business model and highly damaging to consumers and small retailers.

Yesterday Treasury released an options paper for the sector in response to a directive from the government, which has abandoned the reckless indulgence of buy-now-pay-later that characterised the Morrison government in favour of trying to address its harms.

This is a case of regulation playing a great deal of catch-up to a sector that markets have already worked out is at worst a scam and at best a credit product that takes advantage of credit law loopholes to offer money with very poor lending standards — and we know where that leads.

That’s why Block, owner of Afterpay, is worth half what it was in March. That’s why Klarna, European owner of the other big BNPL service, announced a dramatically higher loss of hundreds of millions of dollars in August. The Commonwealth Bank suffered a paper loss of A$2.4 billion on its 5.5% stake in Klarna — it invested early in the European model in preparation of being the Klarna-in-chief in this country. That’s why the owner of Zip Pay was worth over $5 a share at the start of the year and 78 cents now.

This saga of a dizzying surge in the value of BNPL companies before 2022 brought a multibillion-dollar reckoning has been played out to the prattle of inane cheerleading of “disruption” and “game-changing” from outlets like The Australian Financial Review and politicians looking to differentiate their political product.

But the Treasury paper outlines a long list of harms inflicted by the sector:

• The lack of lending standards means people who shouldn’t be borrowing face financial stress and hardship — in many cases when other more traditional forms of credit, that come with higher lending standards, have been exhausted
• The sector has poor complaints-handling processes and they provide little or no hardship assistance for consumers
• Lenders charge excessive fees for the size of loans
• Their product disclosure standards are poor and there are few warnings
• They rely on unsolicited selling and advertising to drive borrowing
• They fail to provide reverse-charging provisions when goods are returned
• They raise maximum credit limits unsolicited, to encourage borrowers.

But the harms of the BNPL sector go beyond those inflicted on consumers. We all subsidise the sector, courtesy of the Reserve Bank’s refusal to prevent it from imposing a prohibition on merchants using the service from charging the costs of BNPL to those using it. That means we all pay for it instead — as Treasury puts it:

There are also concerns that merchant fees are being built into the prices of goods and services in general — even when they are purchased by persons not using BNPL. What this means is that some of the cost of using a BNPL product may be transferred to non-BNPL consumers who are partially absorbing a merchant’s additional costs for participating in BNPL.

Which means that in addition to enabling people to borrow to spend who would not otherwise have been able to borrow, the BNPL sector has been doing its own little bit to add to inflation for all of us.

Treasury suggests three alternatives for regulation — more of the kind of light-touch regulation that the sector has been exploiting for years, but with a requirement for checking creditworthiness, or a requirement for BNPL companies to hold an Australian credit licence, which would subject them to some of the requirements of other credit providers, or changing the Credit Act to bring BNPL services fully into the credit regulatory regime, meaning BNPL services would be regulated similarly to other credit providers.

The final option is the only credible one. BNPL is credit — poorly regulated, with bad lending standards, but it is credit, no matter what furphies or loopholes the sector exploits, and it should be regulated like other forms of credit. In reality it is little better than the parasitic payday-lending sector. Markets have worked out what this sector really is. When will governments?

Is buy-now-pay-later a convenience or a con? Let us know your thoughts by writing to letters@crikey.com.au. Please include your full name to be considered for publication. We reserve the right to edit for length and clarity.