Buy now, pay later providers will face stricter requirements as new regulations come into effect.
Under these regulations, companies in the sector will be obligated to use more comprehensive data to determine and explain the suitability of their loans for customers. The aim is to ensure responsible lending practices and provide greater transparency.
The tighter credit checking requirements may necessitate investment from companies like Afterpay to update their customer approval systems. Furthermore, the new rules will prohibit automatic increases in credit limits, which could have an impact on the overall volume of transactions within the industry, according to stockbroker Shaw and Partners.
Financial Services Minister Stephen Jones announced on Monday that the Australian government plans to regulate buy now, pay later services as credit products. This move will make the voluntary code of conduct, overseen by the Australian Finance Industry Association, mandatory. It will also empower the regulatory body to have greater oversight and enforcement powers within the industry.
This regulatory development represents a significant milestone in a comprehensive process initiated by the federal government in November. At that time, three options were presented to revamp the buy now, pay later industry operations. The new regulations aim to protect consumers and promote responsible lending practices in the rapidly growing sector.
Simon Docherty, Chief Customer Officer at Frollo, told Dynamic Business that their recent research revealed a remarkable 25 per cent year-on-year increase in the utilisation of Buy Now Pay Later (BNPL) services. The study also found that individuals spend an average of $420 monthly on repayments and related fees. Interestingly, the research unveiled that one out of four BNPL users turns to their credit card to settle their BNPL debt.
“Furthermore, our findings reveal that BNPL users are more than twice as likely to also engage with Pay Advance (short-term credit) services compared to the general population. On average, Pay Advance users now spend $749 monthly to service their debt, marking a concerning 60 per cent increase since last year.
“While BNPL and Pay Advance services can seem like a convenient way to manage expenses, they come with some serious risks for both consumers and lenders.
“The majority of BNPL and Pay Advance providers don’t perform credit checks or report the debt to credit bureaus. Consequently, these ‘invisible debts’ make it difficult for other lenders to assess a borrower’s repayment capacity, potentially leading to lending to those who can’t afford it.
“The government’s introduction of the Consumer Data Right three years ago was a promising initial step towards achieving greater transparency, making it possible for lenders to get a comprehensive financial overview when conducting affordability checks. We’re looking forward to the implementation of these newly announced regulations aimed at safeguarding vulnerable consumers.”
BNPL usage and spending trends revealed by Frollo research
Average BNPL spend $439 per month
A closer look at BNPL usage among Frollo users reveals interesting insights. On average, customers spend $439 per month when using BNPL services, which includes repayments, fees, and penalties.
Growth in BNPL use throughout 2022
Amid increasing interest rates and the rising cost of living, the usage of BNPL services grew steadily throughout 2022. In the first quarter, Frollo users who utilized BNPL had an average monthly spend of $417, which progressively increased over the remaining quarters. The average spend reached $426 in Q2, $458 in Q3, and $452 in Q4.
Rising number of BNPL users
The number of people using BNPL services also experienced consistent growth throughout 2022, increasing from 31.2 per cent in Q1 to 33.4 per cent in Q4. Overall, nearly half (43 per cent) of users tried BNPL at least once during the year.
BNPL remains a popular payment option
Despite facing challenges in the past year, BNPL continues to be a commonly used payment option among Australians. On average, users made 15 BNPL purchases per year, utilizing services from an average of 1.7 different providers.
Frollo’s Chief Customer Officer Simon Docherty explains: “It’s clear from our data that BNPL services aren’t becoming any less important to Aussies, and alongside Pay Advance services, are going to be part of the makeup of the consumer finance landscape for the foreseeable future.
“As a result, there are a few things for lenders to consider. A customer spending $500 per month on Pay Advance services might not be able to afford the same mortgage as someone who doesn’t. So it’s essential to get visibility over this spending to reduce risk and lend responsibly. Both ING and Macquarie have recently announced that they will consider BNPL debts when assessing home loan affordability.
“Unfortunately, lenders can’t rely on credit scores to get the complete picture, as most BNPL debts aren’t registered, and most of these services don’t perform credit checks. New legislation is in the works, but it’s unclear whether this will include reporting obligations.
“Open Banking offers a solution for lenders who want to assess home loan affordability better, manage risk and improve their responsible lending. By analysing customers’ transactions across all their financial institutions, Frollo’s Financial Passport provides a complete view of their income, expenses, assets and liabilities – including BNPL and Pay Advance spending.
“Lenders who want to improve their responsible lending practices, and how they manage risk, should consider using Open Banking data for their credit assessments.”
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