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Users of buy now, pay later (BNPL) services may soon have to undergo credit checks under proposed law reform introduced by the federal government.
Under the proposed laws being introduced to parliament this morning, service providers such as AfterPay, Zip and Klarna will be brought under the existing Credit Act and be required to hold a credit licence.
A BNPL service allows the consumer to buy a product but delay the payment, usually paying it off in instalments over a few weeks. No interest is applied, but if the payments are not made on time, late fees occur.
The proposed legislation will put in place consumer protections while maintaining the innovation and competition introduced by the sector, Assistant Treasurer and Minister for Financial Services Stephen Jones said.
"What it will mean is that buy now pay later providers will have to do some basic credit checks on people to ensure that the credit product that they are signing up to is going to be affordable for the individual," Mr Jones said.
The regulation will set the bar "just high enough to ensure that irresponsible lending isn't occurring, but not too high that means credit isn't available to people who need it," Mr Jones said.
"These aren't home loans that people are signing up to. All the bells and whistles that are necessary when you take out a multi-year, many hundreds of thousands of dollars loan might not be necessary but that doesn't mean that there aren't risks involved," he said.
"People who have got multiple accounts, they're racking up thousands and thousands of dollars in debt, they're the sort of things we're trying to ensure protections against and the new laws will do just that."
Until now, BNPL services have been largely unregulated.
Mr Jones said the buy now, pay later industry has known "for quite some time" that regulation is coming.
"We promised before the election that we'd do this, we've been working with them and the consumers and others over the last year and a half to get the balance right," he said.
Zip welcomed the new standards, and said that it already holds a credit licence and conducts credit and affordability checks on its customers.
"We are supportive of the government holding all providers in the sector to the same minimum standard," the company said in a statement.
The Australian Finance Industry Association (AFIA) also welcomed the legislation, saying it provided a "solid regulatory foundation for the BNPL sector."
"This legislative framework will not only enhance consumer trust and enshrine consumer protections into law, but underpin the BNPL sector for the future," AFIA CEO Diane Tate said in a statement.
Two in five Australians used a BNPL service in the six months leading up to March 2024, according to a survey by Finder, with the most frequent adopters being Gen Z (52 per cent) and millennials (59 per cent).
The number of Australians paying late fees increased significantly in the last four years, with 20 per cent paying a late fee in the last 12 months to January 2024, compared to just 5 per cent in January 2020.
Consumer Action Law Centre chief Stephanie Tonkin said more than half of the people presenting to financial counsellors in Australia are struggling to pay off BNPL debt.
"People in financial difficulty, many of them, have buy now, pay later debts. We're not seeing just one account, we're seeing multiple accounts with one provider and multiple accounts across providers," Ms Tonkin said.
At the same time, there has been a change in the items that people are using the services to purchase.
"We're seeing people using this credit to afford essentials. It's no longer for discretionary spending, it's really for your energy, your food, your petrol, medicine," Ms Tonkin said.
She welcomed the proposed changes, but said they could go further to protect the most vulnerable consumers.
"The people we see generally are using smaller amounts of money, multiples of those accounts, and falling into debt spirals because they're having payments taken out day in, day out and you start to lose control," she said.
"You can understand why the word spiral is used because you lose control of when money is coming in and out of your account."