• Eight of Australia’s most prominent buy now, pay later companies have drafted and signed up to a new code of conduct, which went into force on March 1.
• The long-awaited voluntary code comes in lieu of government regulation, with companies largely falling outside of the remit of existing credit rules.
• While the code will require few if any changes among existing providers, Afterpay and others have defended the code, saying customer wellbeing remains a priority.
• Visit Business Insider Australia’s homepage for more stories.

The buy now, pay later (BNPL) sector has so far managed to sidestep Australian regulators, pledging that it has things completely under control even as the sector explodes in popularity.

On Monday, eight of Australia’s largest BNPL companies became beholden to a new code of conduct that they themselves drafted. The voluntary code sets out a range of minimum standards that all eight platforms – Afterpay, Zip, Openpay, Klarna, Humm, Latitude, Payright, and Brighte – have agreed upon, with demands on them increasing as the dollar amount credited to a customer grows.

“The code has kind of reflected the expectations that credit licensees [should] meet and I think they go perhaps a bit beyond where Afterpay has previously been,” Afterpay head of policy Michael Sadaat told Business Insider Australia.

“That includes providing longer notice periods if a buy now pay later provider is looking to increase a fee.”

Most concretely, the voluntary code places a cap on late fees and raises the minimum age of users to 18 years.

For the most part, platforms like Afterpay and Zip were already operating in lockstep with these policies. In fact, they’ve trumpeted that fact as reason why they don’t need further regulatory oversight – claiming they have always gone ‘above and beyond’ what’s required of them. Rather than raise the bar of expected behaviour, the code largely just formalises the standards platforms were already meeting in a canter.

Notably, the bulk of standards apply to higher lending brackets. For example, Australians borrowing less than $2,000 – who make up the vast bulk of Afterpay’s demographic and the broader BNPL market – will just have to make their first repayment upfront and won’t have to do anything more than prove their identity when signing up to a platform. A no brainer.

Under the code, shoppers won’t have to provide anything further (like a bank statement) to prove they can afford their purchase, unless they’re spending above that $2,000 threshold.

Instead of more rigorous checks of customers when they sign up, Afterpay instead says the code’s vulnerability provision pushes companies to help those who come up short after making a purchase.

“We can, for example, offer customers hardship assistance, even if they haven’t missed a payment if you’re up to date on your payments, but you’re worried about the future,” Saadat said.

“[If] you let us know that something’s happened, we will freeze any late fees or [make sure] you’re not even charged any late fees. And we will work out a payment plan.”

None of this however is spelled out or required by the new code.

No legal penalties for those who break the rules

Drafted with the help of Australian financial services advocate AFIA, the code marks a significant victory for the industry, which has lobbied for years to avoid being regulated like other credit products.

Because BNPL platforms charge no interest, they aren’t subject to the Credit Act and have managed to convince Canberra and financial regulators alike that they needn’t be made to meet new legal standards.

Drawing a tenuous comparison to Google and Facebook, platforms like Afterpay claim they are more akin to customer acquisition channels than to credit products – despite the fact they still very much look like credit products.

A parliamentary inquiry has accepted those arguments, despite their holes, and given the rapidly-growing financial product the green light to ‘self regulate’.

Hence the code of conduct was born. However, as consumer advocates and even some rivals are want to point out, the two are hardly interchangeable.

The code does not apply to every buy now, pay later platform in Australia for example and therefore does require all products to even meet a minimum standard. Nor does it carry the teeth of financial regulation.

If a members breaks the code, they only face being named and shamed. It’s a penalty Afterpay says is tough enough.

“It’s a high profile industry, there’s a lot of media attention and the reputation of the industry is really important,” Saadat, a former ASIC regulator, said. “You know, potentially, more than any other type of sanction naming and shaming can have a very powerful effect.”

Holes in the code

But the code falls short on a number of fronts.

Ironically, it does nothing to stop customers using credit cards to pay off their debts, despite the industry having gone hard on the dangers of that particular credit product. Saadat defends this as providing users with “choice” and notes less than one in ten customers pay with one.

Nor is there any codified mechanism preventing customers from amassing unaffordable debts on multiple platforms, or demand more in the way of screening customers.

But again, the platforms believe they’re doing enough, which coincidentally happens to be more than this code asks. Consider Openpay, which lends up to $20,000 over a period of up to two years for everything from home renovations to dental procedures, and thus faces slightly stricter obligations.

“For customers joining for the first time, we’ve got an external credit decisioning engine pulling from various data sources that will calculate initial balances for each individual customers,” chief commercial officer Dion Appel told Business Insider Australia.

“For returning customers, which make up 77% of our users, we can assess their purchasing history and spending patterns to inform our credit decisions.”

It also will ask some customers to consent to a credit check if it requires one. While valid for 12 months Appel maintains the company continues to analyse “a huge amount” of other data to keep a handle on users.

While acknowledging platforms take these extra measures of their own volition, Appel claims that even without strict rules and penalties the onus is on companies to do the right thing.

“It becomes a collective responsibility to protect and build consumer trust,” he said.

No harm, no foul

But despite the protestations of concerned consumer advocates and the demands made by big banks which want to compete in the space, the truth is BNPL companies have already won. ASIC and policymakers alike have concluded they don’t want to interfere lest they risk hurting “innovation”, with these eight companies now worth upwards of $80 billion.

While not all of Afterpay CEO Anthony Eisen’s arguments might add up on that front, Saadat brandishes what could be the sector’s ace in the hole.

“It’s not a question of whether there should be or shouldn’t be regulation…from an outcomes perspective, I don’t think it makes a big difference,” he said.

“Products that are designed with consumer interests at heart, simple, transparent, easy to use products where consumers don’t have to read complex disclosure to understand how it works, I think will go far beyond what regulation can deliver in terms of good consumer outcomes.”

In other words, the buy now, pay later platforms will argue until they’re blue in the face that because they are a better designed credit product, possible harm is minimal.

In a sense, this may be true. Far from charging interest rates of 20%, they are essentially a form of interest-free lay-by that, they argue, make individuals spend more money more frequently. The merit of that argument would account for the fact that retailers have so far been happy to eat the 5% fee for increased revenue. Notably, they do charge customers late fees, with the industry making over $43 million in revenue from them in 2020.

However, Saadat points to the royal commission into the financial services which found, among other things, that a lack of oversight caused big banks and others to put profit before people.

With those institutions are subjected to “voluminous” regulation, they still hurt customers, Saadat argues.

“I actually think one of the lessons from the royal commission is that regulation is not enough. We require more than just rules,” he said.

Of course, that argument misses the fact that it was also a lack of oversight and teeth that precipitated so much wrongdoing in the banking secor, with regulators happy to defer to companies rather than dictate.

They now appear to be doing much the same with BNPL, letting them find their own way in a rapidly expanding experiment.

“We should be held accountable to consumer outcomes, rather than being held accountable to whether we’re meeting a technical requirement of the law,” Saadat said.

The test will ultimately be how much Australians are, or aren’t, hurt by the products. They now have no choice but to trust the platforms on that one.

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