Companies that buy now and pay later have been on a roller coaster since taking office at the start of the pandemic. After quickly gaining public attention, BNPL companies came under scrutiny for the lack of regulation seen in the industry. However, the authorities quickly reacted to this lack of regulation and introduced reforms in the sector.
The drastic turn of events that the BNPL sector is experiencing certainly makes it a unique part of the economy. The new changes are part of a broader movement toward more robust credit laws.
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Additionally, the changes were introduced after a series of bad debts and gluts in credit markets were observed. Many hailed the changes as a fresh start for the BNPL sector, making the environment more protected and safer for consumers and businesses.
Why are Australians borrowing more through BNPL, the payday lenders?
Since the BNPL sector operates primarily through online methods, slippages are likely to snowball into something serious. However, some companies also offer offline methods to execute BNPL transactions. As consumers have the freedom to buy expensive products without paying anything over the counter, there is a serious risk for suppliers.
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Why is the needle on BNPL companies?
Although the industry has been around for a while, it has seen a spike in popularity during the pandemic. Job losses and deferred income have forced many households to rely on the easy loan options presented by the BNPL sector. Essentially, BNPL companies offer consumers the option to pay for products later or in easy installments after purchasing them from the seller.
In a nutshell, BNPL companies assume consumer debt in return for a merchant commission. The striking feature here is that this debt comes without any additional interest. So, the pandemic was the perfect time for the BNPL sector to take off.
Since no additional interest was charged on purchases, BNPL’s services were not directly covered by the Consumer Credit Code. However, new Financial Services Minister Stephen Jones told a recent conference that new protection laws should be implemented by 2023 to protect consumers.
A new set of rules and restrictions is not the only challenge for the industry, as many large companies have also launched their BNPL products. This means increased competition and a move towards a more closed environment could force smaller players in the field out of the market.
What changes will be implemented?
Minister Jones emphasized that BNPL’s services should be considered part of the credit ecosystem as they serve the same purpose as other products in the segment. Additionally, the BNPL sector continues to dominate the market with a large portion of consumers showing interest in BNPL services. This further intensifies the need for regulatory oversight in the segment.
As of now, some enhanced features have also been introduced in the BNPL market, including performing credit checks on consumers before giving advances. However, these features are not mandatory and many companies do not follow them.
Also, there are no restrictions on the number of these services that can be used at a time. This means that a user can enjoy BNPL services from multiple providers simultaneously. While this may seem like an incentive to some consumers, they risk accumulating huge amounts of debt, which lenders might not notice.
This can be a major challenge for financially vulnerable households that fall into the low income category. The additional challenge presented by loan sharks has made the loan market more volatile. They are also known as payday lenders and often target low-income people who are in desperate need of money. These loan sharks also do not charge interest and, like BNPL players, they also escape existing credit regulations.
So, the new changes are aimed at protecting consumers and making businesses a safe environment in which to conduct business. Current BNPL giants such as Afterpay and Zip could see a range of new administrative and documentary work being offloaded to them. However, it would ensure that the sector moves into its next boom phase in a proper and secure manner.