Blog: Afterpay to capitulate on credit checking, as regulation strikes – The Australian Financial Review

“We have started doing credit checks in the US on our buy now, pay later products earlier this year,” said Michael Saadat, head of international public policy at Block, which completed its acquisition of Afterpay in February.

“Even though we are confident in how our product works, given the diversity of the market and the desire to establish minimum standards across the industry [in Australia], we can understand why the government would want to introduce something like this.

“All governments around the world are looking at a similar thing – a bespoke affordability assessment, which is not the same as a fully blown responsible lending assessment.”

As investors digested the potential for new regulation to slow down Afterpay’s onboarding of new customers, Block shares fell 4.3 per cent to $97.76. Zip shares were up 1.3 per cent to $0.78.

Credit licensing option

But Treasury is also considering two other regulatory options. Submissions are due just before Christmas, with a decision to be made in the new year.

Option two involves limited regulation of buy now, pay later companies under the Credit Act.

It would require providers to hold an Australian Credit Licence (ACL). They would be required to participate in credit reporting to credit bureaus and to assess that credit is “not unsuitable for a person”. Treasury said this would be similar to existing responsible lending laws but “scaled to the level of risk of the BNPL product or service”.

Mr Saadat said most elements of option two would be satisfactory to Afterpay. He said option two recognised BNPL was not the same product as credit cards. Although he suggested Afterpay might push back on some suggestions in this option, including preventing BNPL providers from increasing a consumer’s spending limit without explicit instructions from the consumer – a similar prohibition to credit cards.

Afterpay is preparing to fully oppose option three. This proposes to treat buy now, pay later like all other credit products under the Credit Act, including subjecting it to full responsible lending obligations.

Mr Saadat warned this was “using a sledgehammer to crack a nut” and “is not proportionate, not tailored, and does not reflect how buy now, pay later works”.

“There is no government around the world that is looking to apply traditional consumer credit regulation to buy now, pay later without making sure the regulation is proportionate and tailored,” he said.

In Britain, the government is preparing to bring buy now, pay later under the Financial Conduct Authority but to allow it to undertake affordability checks commensurate with its lower risk for customers.

It appears the affordability checks being considered in Australia under options one and two could favour using a credit score as a first step, before potentially moving to income and expense data in bank accounts if the credit score comes in below a certain threshold.

Credit scores

Afterpay would support using credit scores before needing to turn to bank account data, either through ‘screen scraping’ or through the government’s open banking scheme.

Zip managing director in Australia, Cynthia Scott, said it had been conducting affordability checks on customers for years, including looking at income and spending data generated in bank accounts. This allowed Zip to see if a customer has multiple buy now, pay later products being used – which appears to be a concern for the government.

“If new regulation is about being a responsible lender, that is something we are very comfortable with,” Ms Scott said.

“We welcome mandatory credit checks and affordability assessments, and we are already doing it. We think doing an affordability assessment is part of being a responsible lender.”

Minister for Financial Services Stephen Jones told Nine’s Today show on Monday that “a small percentage” of buy now, pay later users “are getting into hot water”.

“We want to ensure that this product is operating safely… within the normal guardrails that operate with other credit,” he said.

Diane Tate, CEO of the Australian Finance Industry Association, which administers the BNPL industry code, said: “We aren’t opposed to regulation, but it needs to be right-sized, and it needs to reflect how things really work and how customers are actually using it. We will continue to advocate for regulation that is fit for the future.”

AFIA has found buy now, pay later contributed $14.3 billion to Australian GDP and created 99,200 jobs in 2021, mostly in the retail sector, where it drives sales for retailers.

The government options paper suggested it realised the importance of buy now, pay later to drive incremental sales to retailers. None of its options would require merchants offering BNPL to be an authorised credit representative of the BNPL provider.

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