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Australia’s largest buy now, pay later (BNPL) firm has called for “partial credit checks” to be given a more prominent role in BNPL regulation, as the sector moves towards similar rules as other credit products.
In a submission to the Australian Treasury, Afterpay proposed that BNPL providers should be required to conduct “partial credit checks” on all contracts of A$5,000 ($3,320) or less.
If adopted, Afterpay’s suggestion would relieve BNPL firms of having to obtain information about the customer’s income, expenses and other low-cost credit contracts or consumer leases.
Under the Treasury’s proposed regulation, BNPL providers would be required to obtain this information first-hand from every customer, regardless of the value of the credit contract.
Afterpay has argued that this obligation would be onerous for BNPL companies, and that partial credit checks would be more suitable.
“This check gives providers access to a richer set of consumer data to assess creditworthiness, and the resulting reciprocity obligations ensure BNPL data is visible to other credit providers,” it said.
This recommendation would also align with research conducted for Afterpay by Mandala, where consumers were asked which type of affordability check would be most suitable for BNPL.
Almost half of consumers said they wanted to be assessed based on their repayment history on BNPL platforms, if available, which is how Afterpay already vets customers.
Meanwhile, 37 percent indicated support for a rapid credit check, while only 15 percent said that having BNPL providers check their income and bank statements would be a suitable method.
In Australia, a partial credit check is a mid-level consumer credit assessment. It is more thorough than a “negative” credit check but less thorough than a “comprehensive” credit check.
A negative credit check includes information on other credit enquiries, defaults, bankruptcies and judgements.
A partial credit check includes the same information plus consumer credit liability information, while a comprehensive credit check includes negative, partial, plus repayment history information (RHI).
In other words, a comprehensive credit check is the only method that looks into a consumer’s record of repayment, with a lookback period of up to two years, showing evidence of how an individual pays their bills.
Afterpay admits that a downside of a partial credit check is that it may not reveal whether a customer currently has payday loans with other providers, as these providers may not engage with the credit reporting system.
“The solution to this is not to require BNPL providers to ask a consumer whether they have payday loans or consumer leases, as the most vulnerable consumers are likely to conceal this information in order to obtain additional credit,” the company said.
“Instead, payday lenders and consumer lease providers should be required to conduct partial credit checks.”
Afterpay noted that payday lenders are currently required to obtain 90 days’ worth of bank statements from customers, but it also said that this “more onerous” obligation should not preclude them from also participating in the credit reporting system.
“This lack of participation means that traditional lenders and low-risk BNPL lenders cannot easily identify customers who are potentially the most vulnerable in the community,” it said.
BNPL set to become regulated credit product
Afterpay’s submission comes in response to the Treasury’s publication of an exposure draft bill that will bring BNPL under formal regulation in Australia for the first time.
The draft bill, which was published in March this year, would introduce amendments to the National Consumer Credit Protection Act 2009 and the National Consumer Credit Protection Regulations 2010.
By doing so, BNPL would come under the existing regulatory framework for other credit products.
The draft bill was open for consultation from March 12 until April 9, and with submissions now closed, the Treasury has published feedback from industry on its website.
PayPal, a major BNPL provider in Australia, did not submit feedback on the draft bill.
Zip, thought to be the second most popular BNPL provider in Australia, raised objections in its submission to the Treasury’s proposed fee caps, which it said are outdated and too low.
“The existing fee caps have not changed since being introduced in 2010, and those same fee caps appeared in earlier State and Territory consumer credit regulations from the mid 1990s onwards,” it said.
Under the National Consumer Credit Protection Regulations 2010, the fee caps imposed are intended to “reflect the costs of establishing and maintaining” a credit account.
“The cost of providing BNPL products to customers has materially increased since 2010,” said Zip, pointing to increases in resourcing costs, interest rates and customer data storage and security.
“The proposed modified responsible lending obligations regime will further increase the cost of providing BNPL products, both from an application assessment perspective as well as ongoing compliance costs,” it added.
“The fee caps should make adequate provision for this cost increase.”
