PayPal, Zip Back Australian BNPL Regulation

February 21, 2023
Large firms in the buy now, pay later (BNPL) arena support the Australian government's plans to regulate the growing sector, but could the collapse of provider Openpay affect final policy decisions?

Large firms in the buy now, pay later (BNPL) arena support the Australian government's plans to regulate the growing sector, but could the collapse of provider Openpay affect final policy decisions?

“PayPal supports the introduction of a tailored, proportionate and thoughtful regulatory framework for the BNPL sector,” the company said in a recently published submission.

Similarly, Zip, which sells BNPL products in Australia, New Zealand and the US, said it encourages a “fit for purpose regulatory regime” that “has the right balance between consumer protections and minimum standards, building confidence in the sector, while encouraging innovation”.

The submissions came in response to the Australian Treasury’s consultation on regulating BNPL in Australia and includes some potentially powerful voices from those inside the sector that are supporting the regulations.

At the end of November, the Australian government laid out three options to regulate the sector from a light-handed government-industry co-regulation building on the industry’s voluntary BNPL code of conduct (Option 1), to using the same regulatory regime for BNPL as for other existing loans (Option 3).

Between the two options is a “limited” BNPL regulatory approach (Option 2), which would require BNPL providers to obtain and maintain a credit licence and introduce an “unsuitability test” for users. This framework would also amend the Credit Act to set obligations tailored to BNPL products.

PayPal, which has its own BNPL product called Pay in 4, says it supports a tailored and proportionate regulatory framework, although “elements of all three options outlined in the options paper could be considered”.

“We do not believe that the full application of existing obligations that apply to more complex, open-ended and higher value forms of credit regulated under the Credit Act should be extended in full to BNPL products.”

Additionally, “while we support the role of voluntary industry self-regulation in developing industry best practice, we believe it is more appropriate for both consumer and industry certainty and competitive neutrality that the minimum expected standards are contained within formal regulation”.

Although data is not available on how many Australians use its Pay in 4 feature, PayPal has a significant payments industry presence with 9.8m users in a country of 25m.

Similarly, Zip, which closed 2021 with 2.8m active users in Australia and New Zealand, said it is also a strong advocate for the Option 2 approach.

“We believe that amending the Credit Act to require BNPL providers to hold [a licence] will ensure the right obligations for internal and external dispute resolution, hardship provisions, compensation arrangements, fee caps and marketing rules.”

The company notes that it already exceeds the obligations required under the voluntary industry code of conduct and its customer origination and credit management process are broadly consistent with Option 2, including the provision of identity and credit checks on all customers, and affordability checks on the majority of accounts.

“Technology allows for these verifications to be performed in real time, with a simple customer experience, and even with the inclusion of these additional consumer protections, Zip’s Australian business has been profitable for five years.”

Meanwhile, Afterpay, another Australian BNPL success story that was sold to Block for $29bn in 2021, said it supports Option 1 and “aspects of Option 2” as part of an expanded regulatory regime for BNPL.

Afterpay argues that existing regulatory frameworks applicable to BNPL products when combined with the voluntary industry code address the key concerns relating to consumer protection.

In this scenario, policymakers could choose to mandate the industry code of conduct for all BNPL providers, potentially as a condition of a new requirement to hold an Australian credit licence.

At the same time, Afterpay strongly opposes “a blanket application of the Credit Act for BNPL (Option 3)”, which it describes as a “disproportionate and damaging response that is not reflective of the evidence of consumer harm in the BNPL sector”.

Other BNPL providers, such as Laybuy, advocated for closer industry-government cooperation whereby the industry code would be strengthened with an affordability test.

After effects of Openpay collapse

In total, there were 68 submissions filed in response to the consultation from various groups of stakeholders.

The submissions were made public last week, although the consultation closed at the end of December, before the collapse of Australian BNPL firm Openpay last month.

Therefore, commenters did not have a chance to consider the implications and potential issues raised by this collapse in these submissions. It is also uncertain to what extent the fate of Openpay could affect policymakers' stance regarding the regulation of the sector.

Although consumer detriment appears minimal, retailers will have been the main party financially affected by the fallout of the BNPL firm’s collapse as they may not be able to get their money back, Lien Duong, senior lecturer at Curtin University, told VIXIO.

On the consumer side, Openpay users may experience inconvenience as they are no longer able to access their Openpay account for new purchases. Their debts will not be erased and they still have to repay the remaining balance in their account, as confirmed by Openpay's receivers.

Duong noted that the current environment of rising interest rates and high inflation discourages consumer spending and it will have a big impact on the BNPL industry.

“Weaker BNPL companies could find it a struggle to survive, leading to collapses like the case of Openpay,” she added.

According to the academic, it is possible that the Treasury will initially take a cautious approach in forming the regulation in the BNPL industry.

“They probably start with a less restrictive option first ( Option 2) before moving to the full regulation under the Credit Act (Option 3).”

In their submission to the Treasury’s consultation, Duong and her colleagues were backing the strongest regulatory approach, asking for additional disclosure requirements for large BNPL providers that reveal how much of their income comes from late fee payments.

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