An estimated 7 million "buy now pay later" users could soon see new laws introduced by the federal government that aims to better protect them against financial abuse.
A new Treasury paper released by Financial Service Minister Stephen Jones on Monday suggested buy now pay later players could soon be subject to the same laws as credit card providers, as "unaffordable or inappropriate lending practices are contributing to financial stress and hardship, and other types of consumer harm".
The paper said there were 7 million active buy now pay later accounts in the 2021-22 financial year resulting in $16 billion in transactions, an increase of almost 37 per cent on the previous financial year.
Mr Jones told ABC News that while these products — offered by well-known players like Afterpay, Zip Pay, humm, and Klarna — can be an easy alternative avenue of credit, often vulnerable and/or younger consumers were at risk.
"A lot of Australians are racking up unaffordable debts," Mr Jones said.
"And what we know is lots of people have lots and lots and lots of buy now pay later accounts.
He said most of these accounts were held by people aged 18 to 35.
"It seems to us that it makes sense to have some credit controls in place."
Consumer groups including Financial Counselling Australia and the Consumer Action Law Centre have long argued that buy now pay later providers should adhere to the same responsible lending laws as other providers of credit.
Despite that, a Senate inquiry into fin tech held two years ago under the previous government, suggested not to regulate them and instead have an industry code that players could voluntarily adhere to if they wished.
'Poor complaints handling'
But the Treasury paper makes it clear self regulation, without some controls, is no longer an option.
It raises a range of issues, noting there's been reports of "poor complaints handling processes" and that "the lack of hardship assistance for consumers leads to delayed or unsatisfactory remediation".
It said, "frictionless sign-up to buy now pay later products enhances other consumer harms, such as scamming, overselling, and financial abuse".
It also raises other issues including "excessive" and "disproportionate" fees and charges being imposed relative to the size of the consumer's debt.
It notes a survey of consumers carried out by corporate watchdog, The Australian Securities and Investment Commission (ASIC) earlier this year, that found 19 per cent of buy now pay later consumers surveyed cut back or went without essentials to make repayments on time.
Another ASIC report based on a detailed look into the industry last year, found that one in five consumers are missing payments.
The Treasury paper also notes that "poor product disclosure practices and a lack of warning requirements means consumers do not have sufficient information to make informed choices".
And that "unsolicited selling and advertising practices" targeting consumers encourage the use of buy now pay later for essentials such as groceries and utilities.
How buy now pay later players could be regulated
The Treasury paper gives three options for regulatory intervention with the strictest being that buy now pay later is regulated under the Credit Act.
"Under this option, buy now pay later providers would need to obtain and maintain an Australian Credit Licence (ACL)," the paper said.
A less stringent option would be to have limited regulation of buy now pay later players under the Credit Act.
"This approach would require buy now pay later providers to obtain and maintain an ACL, plus introduce modified Responsible Lending Obligations (RLOs) under the Credit Act to determine unsuitability, combined with a strengthened Industry Code," the paper said.
And the least stringent option suggested is to strengthen the current industry code, which is currently self-regulated, but to add in an "affordability test" that would try to help determine whether a customer is able to service the debt.
The current industry code has been criticised by consumer groups because is not law and is not enforceable, and any buy now pay later player that fails to comply with its obligations does not face penalties.
"We actually don't want to stop access to appropriate levels of credit products, we just want to make sure that where it is being offered, it's done in a safe way," Mr Jones said.
Consumer groups including CHOICE, financial counselling associations and consumer legal centre around the country, say of the three options explored in the consultation paper, the only one that will adequately address the harm to consumers is for it to be regulated in the same way as other credit products.
They argue that the other two options – beefing up the industry's self-regulatory code with an affordability test or partly bringing buy now pay later into the credit code by introducing a sliding affordability test – would only see the problems continue.
"Many of the people using BNPL are on low, and sometimes, precarious incomes," Financial Counselling Australia chief executive Fiona Guthrie said.
"While the amounts people borrow may look small, the impact when the debt cannot be paid is not. People are having to forgo other essential items in order to pay their buy now pay later debts."
"Buy now pay later is credit, plain and simple, so it needs to be regulated in the same way as other credit products to provide people with adequate safeguards."
Consumer Action Law Centre chief executive Gerard Brody said they were often hearing from people with multiple accounts.
"Buy-now-pay-later and wage advance services don't help people budget, they make it harder," he argued.
Zip managing director Cynthia Scott said they are different from other players in the market in that have always held an Australian Credit Licence (ACL) and conducted credit and affordability tests on their Australian customers.
She said the industry was growing rapidly and "regulation is vital as it matures".
"It is important that appropriate guardrails are in place to ensure consumers are protected," she said.
Laws could be passed before the end of 2023
Mr Jones said regardless of which option the government opts for, all buy now pay later players would need to be asking themselves whether the products they sell a consumer will cause harm.
He said these included questions like: Is this a suitable product? And is it affordable for the person we're pitching?
"And if the answer to either of those is 'no', then they should have systems in place to ensure that somebody doesn't get access to and isn't sold one of their apps or one of their products," he said.
"That seems to me to be a pretty low bar to get over."
Mr Jones said that might also mean that many consumers who to date have been able to get credit under a fast and simple automated online process, may no longer be eligible, meaning some industry players could lose customers and may have to exit.
"I think if providers aren't meeting minimum community standards, they don't have a place in the industry," Mr Jones said.
"The lack of appropriate regulation shouldn't protect those operators."
The industry has been given until December 23 to respond to the Treasury paper.
Mr Jones said after consultation they would settle on one of the regulatory options, and that he was hoping legislation would pass before the end of 2023.
He said businesses had been given ample time to prepare.
"This has been a slow train coming," he said.
