In March 2022, the Australian Buy Now Pay Later Code Compliance Committee (CCC) published its first report, “The First Year of Self-Regulation: A Report from the Buy Now, Pay Later Code Compliance Committee”; the primary purpose of which was to provide details of the performance of the BNPL Code over its first 12 months of operation.
The CCC is responsible for the administration and enforcement of the country’s Buy Now, Pay Later Code of Practice, which entered into force on March 1, 2021, and was welcomed as the world’s first code setting voluntary standards for the buy now, pay later (BNPL) sector.
This regulatory analysis will briefly discuss recent market and regulatory developments in the Australian BNPL industry. It will then look into the content of the BNPL Compliance Report and will consider the key points that stand out from a compliance perspective. Finally, the analysis will focus on the likelihood of and possible reasons for potential regulation of the BNPL sector.
According to FIS’ Global Payments Report 2022, the BNPL industry represented close to 3 percent of the value of all global electronic transactions in 2021, which amounted to US$157bn.
The BNPL sector in Australia, as well as worldwide, has been marked by rapid evolution and hyper-growth, a global trend that has been noted in a recent insight by VIXIO PaymentsCompliance. A Q4 2021 BNPL survey carried out by Business Wire estimated that, in comparison to 2021, the BNPL market in Australia is expected to grow by 72.1 percent in 2022. Another study from Statista reports that as of February 2021, 67 percent of young Australians (referred to as Gen Z) had resorted to BNPL services in the last six months.
Despite its ever-growing popularity in the country, BNPL providers in Australia are currently not subject to regulation and do not need to comply with the domestic credit and lending requirements. As an alternative to introducing a regulatory regime highly contested by consumer groups, companies that are members of the Australian Finance Industry Association (AFIA) can become signatories to the BNPL Code on a voluntary basis, after which they can gain accreditation as code-compliant members. Once a company becomes a signatory, the obligations stipulated in the BNPL Code become contractually enforceable against the code-compliant member.
In accordance with Clause 4.1 of the Buy Now, Pay Later Terms of Reference, AFIA’s board appoints the members of the CCC, which oversees compliance with the BNPL Code in accordance with Clause 9 of the terms. Clause 7(1)(a) of the terms entrusts the CCC with the task of reviewing all BNPL providers’ applications for membership. At present, eight BNPL providers have been accredited as code-compliant members; those are Zip and Afterpay, Australia’s biggest BNPL providers by market share, as well as Klarna, Brighte, Humm BNPL, LatitudePay, Openpay and Payright. According to the BNPL Compliance Report, this group also represents approximately 95 percent of the BNPL market in Australia by volume of transactions.
Australia is among the global leaders in terms of popularity of BNPL services among the local population; according to a Statista report from April 2022 comparing 41 countries, Australia and countries in Northwestern Europe, such as Sweden and Germany, form the top seven countries with the largest market share of BNPL in domestic e-commerce payments. There are also more than 30 market players offering BNPL products, indicating that not all BNPL entities operating in the country have adopted the BNPL Code. Non-signatories are missing out on the key benefit associated with becoming a member, which is boosting the confidence of consumers, regulators and the industry in knowing that a particular BNPL provider is compliant with a code of conduct. As evidence demonstrating successfully undergoing the CCC’s rigorous accreditation checks, each provider also receives an accreditation symbol that can be presented on their website and in all documentation.
The Australian BNPL market also grew exponentially throughout 2021. In the past year, well-known names such as Mastercard have launched their own BNPL programmes in the country, thereby joining a varied mix of different business models, banks and fintechs, payments giants and smaller providers. In addition, some of the highest-value mergers and acquisitions (M&A) transactions took place in the sector, with mobile payments company Square’s $29bn acquisition of BNPL provider Afterpay being the largest takeover in Australian history.
2022 has also brought further consolidation beyond the local market, as Australian companies are looking to expand their global footprint; recent examples include an announcement in February of the acquisition of US-based Sezzle by Australia-based Zip Co.
Due to the consistent growth, the increasing competition between banks and non-bank providers of BNPL services, as well as the emerging trend of M&A-motivated consolidation in the market, multiple market commentators and interested groups, including not-for-profit organisations such as Financial Counselling Australia, have called for regulation of the industry.
In October 2021, the Parliamentary Joint Committee on Corporations and Financial Services concluded under Recommendation 13 of its inquiry into mobile payments and digital wallet financial services that “a parliamentary inquiry into this space is warranted early in the next parliament, starting not later than 18 months after the Code of Practice came into effect”. This indicates that, if this recommendation is to be followed, the next inquiry should be scheduled before October 1, 2022.
As a basis for Recommendation 13, the committee pointed to issues pertaining to consumer protection, the cross-sectoral impact of the BNPL industry, transparency and fees-related practices, among other matters. The committee also recommended a close observation by AFIA of compliance with and usefulness of the BNPL Code over its first year of operation, which were later addressed in the BNPL Compliance Report.
Key Takeaways From the BNPL Compliance Report
Successful Re-Accreditation for All Members
According to the CCC’s BNPL Compliance Report, all code-compliant members have been successful in their re-accreditation for the period of March 1, 2022–February 28, 2023. This determination is not automatic, as the CCC needs to reach this decision by examining multiple criteria despite having granted initial accreditation to a particular provider.
To gain their initial accreditation, BNPL organisations must meet the criteria stipulated in Clause 5.1(a)-(f) of the Buy Now, Pay Later By-Laws. These criteria include:
- Not having a director who is bankrupt or has declared bankruptcy as defined under the Australian Bankruptcy Act.
- Not having a director or a majority shareholder who is or has been found to be guilty of any regulatory law breaches of significance to AFIA.
- Demonstrating that the organisation has appropriate risk management procedures, taken in addition to implementing adequate mechanisms for compensating BNPL customers for damages attributed to the BNPL lender.
- Complying with “any other reasonable requirements” determined by AFIA and the CCC with regard to compliance with the BNPL Code.
- Presenting evidence to the CCC that shows that the organisation has implemented all systems and procedures necessary for compliance with the BNPL Code as far as its BNPL products and services are concerned.
In addition, as Section 6 of the BNPL Compliance Report clarifies, in the course of the past year, the CCC has requested code-compliant members address multiple additional issues that would classify as “any other reasonable requirements” under Clause 5.1(e) of the BNPL By-Laws. Such issues include:
- Implementing additional automated controls concerning the determination of the financial circumstances of customers, particularly at the upfront assessment stage for amounts exceeding a certain threshold.
- Enhancing and improving access to information regarding financial hardship and potential assistance on a code-compliant member’s website, an obligation to treat customers fairly and respectfully expressly stipulated under Clause 14 of the BNPL Code.
- Addressing requests for further information and data by the CCC in a timely manner.
To preserve accreditation, Clause 6.5 of the BNPL By-Laws provides that all code-compliant members must provide an annual attestation of their compliance with the BNPL Code, “in such form as the CCC may require from time to time, and will include a certification by a director or other appropriately authorised person of the Code”. Although the compliance report does not shed additional light on the form and content of the information the CCC has received from the members, it is apparent that all signatories have provided sufficient evidence in this respect.
One of the developments of the BNPL self-regulation regime is the introduction of a complaints mechanism for consumers. Under Section 7 of the compliance report, the CCC has also dedicated significant attention to addressing the handling of customer complaints from the past year.
In accordance with Clause 9.2(a) of the BNPL Terms of Reference, all members are required to report complaints data to the CCC. Relevant complaints data includes information on alleged breaches of the BNPL Code submitted both through the BNPL provider’s internal dispute resolution (IDR) procedures, as well as through the external dispute resolution (EDR) procedures available to customers at authorities such as the Australian Financial Complaints Authority (AFCA). In this respect, the compliance report points out statistics that suggest that the overall number of IDR and EDR complaints taken for every 1,000 customers on an aggregated basis is minimal: under 0.2 complaints per 1,000 customers for EDR complaints and under 1.8 complaints for IDR complaints. It also demonstrates that a majority of complaints were submitted through members’ IDR processes.
Furthermore, under Clause 13.13 of the BNPL Code, a consumer is granted the right to report alleged breaches of the code to the CCC, in addition to submitting complaints to the responsible provider or the AFCA. A customer can report any violation of the nine contractually enforceable “customer commitments” undertaken by BNPL providers. According to Part B, Clauses 8-16 of the BNPL Code, such commitments include:
- Focus on customers.
- Fair, honest and ethical treatment in all dealings.
- Keeping the customer “properly informed” about BNPL products and services.
- Ensuring that BNPL products and services are suitable for both new and existing customers.
- Undertaking an ongoing review of the suitability of BNPL products and services.
- Dealing fairly with complaints.
- Offering financial hardship assistance.
- Complying with legal and industry obligations.
- Supporting and promoting the BNPL Code.
Bearing this in mind, the compliance report presents evidence of a very limited number of complaints — only five — that have been submitted to the CCC over the 12 months of enforcement of the BNPL Code. Out of these five complaints, four were tackled under the member’s IDR procedure and are of confidential nature.
In relation to the fifth direct complaint that also remains confidential, the CCC exercised its powers granted under Clause 10.1 of the BNPL Terms of Reference by opening an investigation into the member’s compliance with the BNPL Code. The complaint involved allegations of maladministration of a customer’s account and the CCC determined that the BNPL provider did not violate any obligations. Despite having reached this decision, the CCC called upon the member to review its credit policy and its compliance with regulations protecting the rights of customers receiving disability support pensions. It is reported that the code-compliant member complied and conducted all necessary reviews; as a result, no further action was necessary. This complaint also sheds light on the general nature of alleged violations by providers that are more likely to lead to an investigation by the CCC.
By remaining compliant with the BNPL Code, members have avoided consequences for “serious” non-compliance, which could come as a result of the CCC’s powers to suspend a member’s code-compliance certification, to terminate a provider’s AFIA membership or to impose sanctions, among other possible measures listed under Clause 7.2 of the BNPL By-Laws. However, it would be difficult to determine the efficiency of the complaints mechanism due to all confidential details omitted from the report.
The key takeaway remains that all supervised members have met their basic obligations. This, taken in addition to the appropriate tackling of all requests for information from the CCC and the lack of major complaints against the providers, suggests that regulation of the industry may not be needed if the code is followed and applied appropriately. However, notwithstanding the presence of a voluntary self-regulatory regime, recent indications by the Australian and foreign regulators suggest that BNPL regulation may still be necessary.
Growing Likelihood of BNPL Regulation in Australia and Beyond
As admitted by the Australian Treasury in the “Transforming Australia’s Payments System” report from December 2021, the fast speed of innovation in the payments industry, including BNPL, has surpassed the pace of development in the country’s regulatory framework. Andy White, chief executive of the Australian Payments Network, Australia’s payments industry body, has also called for advancing the regulatory and licensing regimes to address “money in movement”; this is to be taken in addition to the regulators’ current focus on dealing with “money at rest” by tackling issues pertaining to deposit-taking, among others. It is undetermined whether the government will deviate from this approach specifically towards the BNPL industry by opting for regulation at this stage; however, there have been recent regulatory developments that the industry should closely follow in the meantime.
First, in the “Transforming Australia’s Payments System” report, the Australian Treasury explicitly committed to looking into further payments modernisation and potential legislative initiatives, which would aim to address the emergence of BNPL services by mid-2022. In the same report, the government addresses recommendations made by the Parliamentary Joint Committee on Corporations and Financial Services from its mobile payments and digital wallets inquiry. With respect to Recommendation No. 6, suggesting that AFIA should preserve its supervision functions over the BNPL Code, the Treasury briefly indicated that the recommendation is “noted”, which implies that the matter is being left open to further discussion. Moreover, in a December 2021 speech announcing Australia’s payment regulation priorities, Treasurer Josh Frydenberg confirmed that the federal government plans to legislate “the most significant reforms to [the Australian] payments system in 25 years”.
If it opts for regulating the BNPL sector, Australia will not be the first country placing additional emphasis on what it calls “risk-based regulatory requirements”. To compare to another common law jurisdiction, in January 2022, the UK Treasury also closed a public consultation on BNPL products. The consultation aimed to determine the scope of a potential BNPL regulation and was explored in greater depth in a recent regulatory analysis by VIXIO. Furthermore, in a regulatory announcement on February 14, 2022, the UK Financial Conduct Authority confirmed that it was “concerned with the risk of harm to consumers” when it secured the voluntary changes to contract terms undertaken by four major BNPL providers — Klarna, Clearpay, Laybuy and OpenPay.
There are growing calls for regulation across various states in the United States as well. As BNPL schemes are governed by laws at both the state and federal levels, the California Department of Financial Protection and Innovation, California’s financial services regulator, led the way to a stricter application of the consumer credit regime by categorising BNPL products as loans in its enforcement actions, including in actions taken against Afterpay and QuadPay (now Zip) in 2020. In addition, in December 2021, the US federal agency overseeing consumer protection in the financial services sector, the Consumer Financial Protection Bureau (CFPB), also launched an inquiry into the lending practices of five leading BNPL providers — Afterpay, Affirm, Klarna, PayPal and Zip. In its announcement, the authority cited regulatory arbitrage, consumers’ growing debt and providers’ data collection practices as the main reasons motivating the inquiry. In January 2022, the CFPB quickly followed up with a public consultation on BNPL products.
At the European Union level, the European Commission also made sure to bring BNPL products within the scope of its proposal for a directive on consumer credit in June 2021. As of April 2022, the directive is being discussed under the auspices of the European Council, particularly in its Working Party on Consumer Protection and Information.
However, there are also countries which can be perceived as exceptions to what appears to be a growing global trend of increasing scrutiny of the BNPL sector. For example, according to recent statements of the Singaporean government, BNPL products do not pose significant risks for consumers and plans for the industry will follow a self-regulation model similar to the Australian BNPL Code. In March 2022, the Singapore FinTech Association (SFA) announced the formation of a special working group aiming to produce a voluntary BNPL code. Furthermore, in April 2022, the Monetary Authority of Singapore and the SFA informed the Singaporean parliament of their plan to introduce a BNPL code of conduct in the second half of this year.
Although it seems that multiple large Western economies are adopting a similar approach by initiating a discussion of the BNPL industry, it is still difficult to predict the preferred course of action in Australia. There may be an increased likelihood of new regulatory requirements for BNPL providers in the near future, but it would also be challenging to foresee their precise form and content.
Planning for the Future
Even in the absence of legal clarity and regulatory consistency so far in 2022, it is essential for BNPL providers to be prepared for all possible regulatory scenarios.
There could be a wide variety of potential regulatory changes coming up on the horizon; those could include rules and requirements addressing issues such as credit reporting, customer solvency and creditworthiness, as well as late fees. A recently emerged, yet major, motivator for introducing such measures could be consumer protection in light of the current inflation and the cost-of-living crisis brought about by the Russian sanctions regime. According to a CHOICE report from January 2022, one in five Australian citizens have used BNPL services to cover essential household items in the past 12 months; this rise of debt and BNPL spend has resulted in an increase in calls for regulation from consumer groups in nine countries.
Another potential area of regulatory focus may be establishing and building best practice across the industry. Whereas this is currently a responsibility of the CCC in Australia, the BNPL Compliance Report did not provide any guidance to members and the wider community in this respect. This omission leaves the self-regulation regime open to criticism by consumer protection groups which have been calling for increased transparency and fairness in the sector.
Furthermore, regulation of the BNPL industry would strengthen consumers’ rights from a procedural perspective due to stricter enforcement measures by regulators. To compare, the success of the BNPL industry in Australia is often explained in the context of the country’s long-standing relationship with lay-by agreements — written contractual arrangements allowing consumers to pay a supplier for consumer goods in two or more instalments. Lay-by agreements are regulated by the Australian Competition and Consumer Commission (ACCC) under Part 3-2, Division 3 of the Competition and Consumer Act 2010.
The regulatory framework applicable to lay-by agreements has not only led to investigations but has also resulted in regulatory litigation in the past. For example, in 2013, the ACCC took action with respect to information received from a not-for-profit credit counselling organisation, the Indigenous Consumer Assistance Network, and brought proceedings against Christmas hamper e-commerce platform Chrisco before the Australian courts. The issue at stake involved consumers struggling to meet their lay-by payment obligations due to alleged unfair contract terms included in Chrisco’s “HeadStart Plan”. In November 2015, the Federal Court of Australia ruled that Chrisco had breached the Australian Consumer Law on the basis of insufficient transparency and imbalance in the rights and obligations of the company and its customers. In July 2020, the ACCC accepted a court-enforceable undertaking by Chrisco that acknowledged its consumer law breaches and agreed to amend its plan’s terms and conditions.
To draw an analogy between lay-by agreements and BNPL products, potential BNPL regulation could lead to more complex and costly interactions between providers, consumers and consumer groups, regulators and, occasionally, courts. In addition to this added complexity in the public regulatory and enforcement realm, it should be noted that the picture would not look simple on the private enforcement side either: Australia’s class action framework is favourable to consumer protection claims, which could pose another potential challenge for providers in the longer term, especially in the event that regulation is introduced.
Whereas there may be further issues that BNPL providers will need to consider when it comes to Australia’s fast-moving regulatory environment, it is particularly important for all entities to preserve their flexibility in addressing all potential challenges while, at the same time, familiarising themselves with the key differences between conducting business in a regulated and self-regulated environment.
In terms of next steps, the Australian Treasury aims to announce its plans for the BNPL industry by mid-2022. In the meantime, all entities should prepare for the potential introduction of BNPL regulation.
The findings of the BNPL Compliance Report suggest that the self-regulatory regime under the BNPL Code has been efficient in its first year, particularly when it comes to the accreditation and complaints procedures under the code. All members have preserved their accreditation due to their willingness to collaborate with the CCC and provide all requested information when needed. Each one of the five complaints submitted by customers has also been handled appropriately, including a more complex complaint by a financially vulnerable customer.
However, the BNPL industry is fast-growing, even while there are still loopholes in the transparency of the system and increasing concerns over the financial health of consumers. All of this has attracted the attention of regulators and consumer groups in Australia and worldwide, which will likely persist as a trend in the near future.
This trend may or may not result in regulation of the BNPL sector, but the Australian government will most likely need to set appropriate parameters by addressing whether and to what extent BNPL products should be treated as consumer credit. Regulation may mitigate risks for consumers by tackling issues pertaining to customer solvency, late fees, financial detriment and independent dispute resolution procedures. As long as BNPL regulation does not impose an excessive administrative burden, disclosure obligations and checks requirements on BNPL providers, additional consumer protections would not necessarily adversely affect the BNPL industry due to the undeniable convenience of BNPL products.
If they opt for regulation, it is essential for Australian lawmakers to strike a balance between the interests of consumers and providers through a thorough risk-benefit analysis. Disproportionate regulatory requirements may stifle innovation and competition in the sector, placing smaller BNPL providers with more limited resources at a disadvantage in comparison to major Australian BNPL companies and banks. In contrast, an appropriate amount of oversight and supervision could achieve a level playing field and lead to sustainable growth in the sector.