Global: Australia Introduces Legislation to Regulate Buy-Now-Pay-Later Services with Mandatory Credit Checks

The Australian government has introduced new legislation requiring buy-now-pay-later (BNPL) companies to conduct credit checks on borrowers, aiming to regulate the rapidly expanding sector popular among young consumers. The legislation was announced on Wednesday, marking a significant shift in how BNPL services will be managed, aligning them more closely with traditional consumer credit products.

BNPL firms, which typically offer on-the-spot interest-free short-term loans with minimal credit checks, have seen a surge in usage. These services allow consumers to spread payments over weeks or months, attracting many cash-strapped individuals who sometimes take on more debt than they can handle. Until now, BNPL companies have largely avoided the regulations that apply to credit card providers, as their primary revenue comes from merchant fees rather than interest payments.

Under the new laws, BNPL providers will be required to hold an Australian credit licence, bringing them under the supervision of the Australian Securities and Investments Commission (ASIC). “If it looks and acts like credit, then it should be regulated as such,” said Minister for Financial Services Stephen Jones in a statement. The legislation aims to establish a new category of “low-cost credit” to reflect the lower risk and cost associated with BNPL compared to other regulated forms of credit.

The BNPL industry experienced rapid growth during the COVID-19 pandemic, driven by a surge in online shopping and stimulus payments amid ultra-low interest rates. However, concerns about consumers’ ability to repay these loans have increased as Australia grapples with persistent inflation. Data from fintech firms indicate that Gen Z consumers, those aged between 18 and 25, constitute the majority of BNPL users.

Australia, home to about a dozen listed BNPL providers, had approximately 7 million active BNPL accounts with an average transaction amount of A$136, according to treasury data released last year.

Peter Gray, co-founder of BNPL firm Zip Co, welcomed the government’s announcement, stating that the legislation aligns with the company’s existing practices. Afterpay, owned by Jack Dorsey’s Block Inc, did not immediately respond to requests for comment.