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Does buy now, pay later need tighter regulation?

Buy now, pay later (BNPL) providers say their new self-regulation code of conduct is sufficient. We’re not so sure.

buy now pay later
Last updated: 30 June 2021
Fact-checked

Fact-checked

Checked for accuracy by our qualified fact-checkers and verifiers. Find out more about fact-checking at CHOICE.

Need to know

  • 95% of the BNPL market in Australia is controlled by eight companies that have signed up to their own code of conduct
  • Consumer advocates say BNPL providers have done this to ward off further regulation of the industry
  • Standards for responsible lending checks fall below those for other forms of credit 

Benjie Sacchetta is on a disability support pension. For him, getting by financially week to week in Adelaide is a struggle. He uses buy now, pay later (BNPL) services frequently to help spread the costs of both small and large purchases, but he describes such services as a "double-edged sword".

"They are quite helpful in an emergency, but it's quite easy to get bogged down by them," he tells CHOICE. 

"You think at the times you need the money, there is a huge sense of relief, but then all of it comes through and that relief turns to a sinking feeling of 'I have to pay all this back'. 

"You realise 'I'm not going to be able to guarantee enough money at the end of the week'."

'Broke as hell'

According to a report by the Australian Securities and Investments Commission (ASIC), one in five users of BNPL miss instalments and have to pay late fees on top of the scheduled repayments. Benjie is one of them.

"There are always paydays where I can't put petrol in the tank … it gets to a point where it becomes crippling," he says.

It does become a trap and they just keep giving you more and more

Benjie, pensioner and BNPL customer

He also says the higher spending limits BNPL providers award him after he successfully makes a repayment are an issue.

"It does become a trap and they just keep giving you more and more, until you're sitting there broke as hell on a payday because you've got to pay it all back."

woman paying bills

The BNPL market in Australia

In the first article in this series, we explored the financial hardship that some BNPL users get into and whether vulnerable people use the services just to get by.

In this article, we take a closer look at BNPL, including the industry's new self-regulation code of conduct, and ask whether tighter regulations are needed.

In Australia, 95% of the BNPL market is controlled by eight companies: Afterpay, Brighte, Humm Group, Klarna, Latitude, Openpay, Payright and Zip Co.

Afterpay is by far the largest player, making up almost three in four (73%) of all BNPL transactions in 2018–19. Afterpay was followed by Zip Pay and Humm, each sharing about 10% of transactions. 

Multiple accounts, rising credit

But customers aren't limited to holding just one BNPL account. Financial counsellors who work on the frontline say many customers like Benjie end up financially stretched between several providers. 

Humm offers new customers up to a staggering $30,000 for things such as home renovations

Some BNPL providers offer customers a relatively small amount of credit upfront. Afterpay, for instance, offers $600 to new customers. But, like many of these companies, Afterpay increases the limit of what you can borrow if you make repayments successfully.

Other providers offer much larger sums – for example, Humm offers new customers up to a staggering $30,000 for things such as home renovations.

Our buy now, pay later comparison shows the borrowing limits, fees and structures of Afterpay, Zip Pay, Humm and the smaller provider Deferit.

Eight BNPL providers signed to voluntary code of conduct

Because BNPL providers don't charge interest, they aren't regulated under the National Credit Code as credit cards and payday loans are. Nor do they have to comply with the responsible-lending and financial-hardship regulations that come with the Code.

But the industry is subject to ASIC's intervention powers, and the Australian Competition and Consumer Commission (ACCC) has previously written to merchants expressing its concerns about surcharges on BNPL transactions. 

Because BNPL providers don't charge interest, they aren't regulated under the National Credit Code as credit cards and payday loans are

Eight BNPL providers, representing 95% of the market, have signed to a voluntary code of conduct, which came into effect in March this year. The industry lobby group, the Australian Finance Industry Association (AFIA), claims this voluntary code negates the need for further regulation.

"The advantage of industry self-regulation is that it can be dynamic in the way that legislation cannot – meaning it can keep pace with innovation, changes with technology, and changes in community expectations," an AFIA spokesperson tells CHOICE. "This code will evolve – the launch on 1 March was the end of the beginning." 

'Not good enough'

Julia Davis, senior policy officer at the Financial Rights Legal Centre, says the code is "a good start", but is "not good enough".

"We know the royal commission was very critical of industry self-regulation codes, that codes are not complied with, they have really weak monitoring and enforcement, and there are almost no consequences for breaching," she says.

"Often they act like a fig leaf to avoid proper regulation, and I think that's what's happening here."

The royal commission was very critical of industry self-regulation codes… Often they act like a fig leaf to avoid proper regulation, and I think that's what's happening here

Julia Davis, Financial Rights Legal Centre

AFIA says there are serious consequences for breaching the voluntary code. The code compliance committee can impose sanctions for non-compliance, including the naming and shaming of non-compliant BNPL providers and the suspension of their membership.  

"The committee will be obligated to impose certain mandatory sanctions for breaches deemed 'significant', for example, a breach that is found to be systemic in nature will then require reporting to ASIC," AFIA says. "Having mandatory sanctions goes above and beyond other industry codes. The sanctions include the power to publicly name a non-complying BNPL provider." 

But Davis says this doesn't go far enough or change the fact that further regulation is needed. "When you have law you have law enforcement," she says.

Affordability checks and responsible lending

AFIA stresses that all BNPL providers that have signed up to the code carry out "in-life suitability assessments" for all customers. The code says that a check on customers borrowing less than $2000 must use at least one data source.

For customers who are using BNPL providers for amounts between $2001 and $15,000, the provider will do either a customer data check themselves or via a third-party like a credit rating agency. For amounts of more than $15,000, providers must do both.

Checks fall short

Tom Abourizk, a policy officer at Consumer Action Law Centre, says the thoroughness of the background checks for amounts of less than $15,000 fall well short of the responsible lending obligations that would be required if BNPL providers were forced to comply with the National Credit Code.

Under the code you can go out and get thousands of dollars of credit without anyone properly assessing ... your ability to repay it

Tom Abourizk, Consumer Action Law Centre

"Under the [industry self-regulation] code there is no sort of commitment to doing anything close to responsible lending," he says.

"Under the code you can go out and get thousands of dollars of credit without anyone properly assessing what your ability to repay it is."

woman with child worried about debt

More regulation needed

Abourizk says consumer groups such as Consumer Action, which were consulted in the establishment of the industry code, gave feedback and that "marginal improvements" were made.

"It has still fallen well short of what we would expect for people, especially people with low levels of financial literacy or people who are experiencing financial hardship," he says.

"The whole code was designed for these business models so that they wouldn't have to change them at all." 

'A diversionary tactic'

Patrick Veyret, CHOICE senior policy and campaigns adviser, agrees that "an industry code is no substitute for a rigorously enforced law". 

He says, "While there have been minor improvements for consumers, at its core, the BNPL code is a diversionary tactic by the industry to ward off government regulation.

Make no mistake – buy now, pay later is a form of credit and should be regulated as such

Patrick Veyret, CHOICE senior policy and campaigns adviser

"Make no mistake – buy now, pay later is a form of credit and should be regulated as such. The industry is relying on a loophole in the law. It is especially concerning to see operators selling people into BPNL loans up to $30,000 without protections of existing credit law."

'No more than a slap on the wrist'

Veyret says the banking royal commission has shown the need for strong regulatory oversight and enforcement of lending and that, without it, people will be taken advantage of.

"Naming and shaming non-compliant operators amounts to nothing more than a slap on the wrist," he says. "The community expects strong action to be taken by regulators against financial services providers who take advantage of people. Simply naming and shaming fails to achieve this." 

BNPL investigation series

This is part two in our investigation into buy now, pay later services.

If you need help tackling your debt, call the National Debt Helpline on 1800 007 007 for free, confidential and independent information and advice.
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