Financial institutions, fintechs, and regulators have welcomed new buy now, pay later (BNPL) rules that will finally treat the sector like other credit providers, with new legislation passed hours before shoppers tapped BNPL to propel Black Friday sales to record-breaking heights.

The new regulations will apply corporate regulator ASIC’s National Credit Code (NCC) to a BNPL sector that has to date relied on self-regulation.

Although BNPL was recognised as credit years ago, the slow implementation of new laws left them operating in something of a grey area, free from the controls of the National Consumer Credit Protection Act.

Many BNPL providers have embraced the Australian Financial Industry Association (AFIA) voluntary code of conduct, and some had joined the Australian Financial Complaints Authority (AFCA) complaints framework, which is mandatory for other credit providers.

AFCA last year fielded 1,929 complaints about BNPL firms – up 16 per cent annually – with chief ombudsman and CEO David Locke welcoming new legislation that “extends important consumer protections to BNPL users that have been available for other forms of credit”.

BNPL firms will now be managed under a new NCC category, low cost credit contract (LCCC), said to provide “appropriate and proportionate protections to consumers who enter LCCCs, while maintaining the benefits of consumer access to these kinds of credit products”.

“[Regulators] needed to make sure that BNPL providers could still provide credit efficiently and at low cost,” said Michael Blyth, general manager for policy and advocacy at Arca (previously the Australian Retail Credit Association), in welcoming new disclosure obligations, hardship protections, and dispute resolution rights.

“They took a bit of time to work out how to do that, and we think they have largely succeeded: when you lend to a consumer, you have to ensure that they can afford it and that the credit is suitable for them," he told Information Age.

The new rules were a “balanced and proportionate regulatory approach,” AFIA CEO Diane Tate said, that “will enhance consumer trust, enshrine consumer protections into law and allow BNPL to continue to play an important role in our digital economy”.

Reining in a fintech success story

The protections come four years after ASIC criticised fast-growing BNPL operators for failing to consider consumers’ ability repay mounting debts, with fintechs and Big Four banks alike pouring billions into a sector providing short-term credit to millions of consumers.

With many consumers taking out multiple BNPL contracts and the industry fighting to avoid having to evaluate consumers’ broader financial positions in making funding decisions, surging BNPL debt finally drove the government to action in late 2022.

Australia’s 5.2 million BNPL customers spent an average of $132 each, according to the AFIA, with consumers spending $22.9 billion on BNPL throughout 2023 and merchants benefiting by $1.9 billion for supporting them.

The services have been particularly popular among Gen Z and Gen Y shoppers, with Finder surveys finding that while 41 per cent of Australians used BNPL in the past six months, that rose to 57 per cent for Gen Z and Gen Y consumers.

With BNPL normalised, the financial counselling sector “has wanted BNPL products treated as credit since they were first introduced in Australia”, Financial Counselling Australia co-CEO Domenique Meyrick said, noting that counsellors “see the harm BNPL products can cause”.

“Many people have multiple, small amount accounts and these are getting some into debt spirals.

“… These new laws will go a long way to protect consumers from getting into unnecessary debt.”

Bringing predictability to consumer spending

Consumer and industry groups welcomed the new legislation, which passed into law during Parliament’s marathon session on 28 November – which, coincidentally, was the eve of Black Friday sales events that saw Australian consumers spend in record numbers.

Merchants using payment provider Shopify were taking in $7.1 million ($US4.6 million) per minute by noon on Black Friday, the firm reported, with Australian sales increasing by 25 per cent over last year’s Black Friday event and the average consumer spending $187.68.

The new legislation was “a welcome development [that] will ensure strong consumer protections while enabling Australians to continue accessing the benefits of BNPL,” said FinTech Australia head of policy Katie Wilson.

Consumer Action Law Centre CEO Stephanie Tonkin said it was about time.

“We have fought long and hard to have BNPL treated like other credit products,” she said, noting that “regulating BNPL products couldn’t be more important in a cost-of-living crisis”.

By forcing consumers and providers to better consider their overall debt, Choice CEO Ashley de Silva said the new laws “will help make BNPL loans safer and fairer [and] greatly reduce the risk of people being signed up to unaffordable BNPL loans that leave them worse off”.