Moody’s Investors Service analysts said a significant strengthening of regulations would create “continuing hurdles for fintechs” that were already struggling amid rising interest rates and a lack of profitability by making it more difficult to add customers.
Last week,Openpay became the first ASX-listed buy now, pay later group to call in administrators,and others in the sector have had large falls in value.
Other credit providers are required to ask for a large amount of detail from potential borrowers, taking several days to process loan applications. The buy now, pay later sector is not currently bound by these obligations.
Buy now, pay later products offered by companies such as Afterpay and Zip – which don’t charge interest – are used by 7 million Australians; transactions grew 37 per cent by value to $16 billion in the year to June 30.
ASIC’s position, calling for the most onerous of three regulatory options floated by Treasury, was backed by a coalition of consumer groups and two major banks in their submissions to the process.
The least onerous option would only strengthen a code of conduct, administered by the Australian Finance Industry Association, and require providers to ensure a product is “not unaffordable” for a person before offering it.
Afterpay – which does not conduct credit checks on customers, turbocharging its growth – and theAustralian Retailers Association, whose members sales have been lifted by the growing use of buy now, pay later, favour this lightest-touch option.
Treasury also proposed a middle option: bringing buy now, pay later inside the Credit Act and applying a “tailored” version of responsible lending obligations that “may include removing some prescriptive requirements”.Commonwealth Bank, which has launched its own buy now, pay later product called StepPay, supports this option.
On Thursday, Financial Services Minister Stephen Jones said it would take more time for the government to decide on the model.
It remains unclear what responsible lending checks might be required from buy now, pay later providers. ASIC’s guidance says customer checks can be “scalable”, but it has not defined what this means for small, short-term loans.
Afterpay is concerned that it might be required to gather customer income and expenses data – similar to what credit card providers do – to determine if a loan is suitable, and is pushing for a system that allows checking using simpler credit scores that can be accessed digitally.
Wide support for toughest option
In its submission, ANZ also said buy now, pay later should be regulated similarly to other credit products.
“This option provides for consistent regulation of BNPL products and other products that could be considered to present similar functionality and risk,” it reads. “Consistent regulation would allow for competitive neutrality between BNPL and other products, and will help ensure predictable and consistent customer protections.”
The Australian Banking Association said not enough detail was provided in the consultation options to pick a model. Banks want buy now, pay later subjected to credit reporting laws – which was not proposed in any of the models – to allow banks to see buy now, pay later debts held by prospective customers.
But submissions published on Thursday show widespread support for the toughest model proposed by Treasury. ASIC and ANZ have been joined by Westpac, the Customer Owned Banking Association, the Australian Retail Credit Association, the Mortgage and Finance Association of Australia and National Legal Aid in supporting that option.
“We’ll only get one chance to get the regulation of BNPL right. And this is it,” Financial Counselling Australia chief executive Fiona Guthrie said.
“As the banking royal commission showed in spades, loopholes in the law are disasters. BNPL is credit. It should be regulated like all other credit products.”
‘Continuing hurdles’
Analysts said if adopted, the toughest option would create additional challenges for a range of smaller buy now, pay later players who were under pressure on the stock market.
Zip, Humm and Block – which acquired Afterpay – will report financial results over the coming weeks as investors remain concerned that regulation will slow growth. Humm shares are down 14 per cent in the past month and Zip is trading 11 per cent lower.
Moody’s Investors Service said proposed tighter rules were potential hurdles for companies already facing a very difficult funding environment, which had exposed weaknesses in their business models that were built in an era of cheap credit and low defaults.
“Regulation remains a continuing hurdle for fintechs,” Moody’s vice president Stephen Tu said on Thursday.
“In Australia, the once fast-growing BNPL sector is facing scrutiny as the government is considering a number of options to enhance the regulation of consumer credit. More regulatory burdens will result for all BNPL providers, including Afterpay and Zip.”
The UK is also pushing ahead with tougher regulation of the sector. The UK Treasury said this week providers would be regulated by its Financial Conduct Authority and consumers would get the right to have complaints reviewed by the financial ombudsman. It plans to require credit assessments using data held by credit bureaus.
Zip has backed a tough model, saying it already conducts credit checks, and is capable of meeting any additional requirements.
Afterpay has alreadybegun credit checking some customers in the US anticipating tougher rules in Australia. However, it remains concerned that a lack of guidance in the credit laws will make it unclear what is practically required to conduct sufficient checks given its credit limits are initially low.
ASIC said in its submission its work “suggests that there is generally little evidence to support reduced responsible lending obligations for buy now, pay later providers” and “there is room in the existing regulatory framework for flexibility and further modification to lender obligations in appropriate circumstances”.
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