Analysis: Australian buy-now, pay-later sector faces fresh hurdle: regulation

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28/11/2022 05:39

By Byron Kaye and Lewis Jackson
       SYDNEY, Nov 28 (Reuters) - When Melbourne barista
Melinda Elliott had to cut back on casual work shifts this year,
she asked her buy-now, pay-later (BNPL) provider, Afterpay, to
lower her credit limit. She did not want debt she could not
afford to repay.
    The Australian company, owned by Twitter founder Jack
Dorsey's Block Inc  SQ.N , cut her limit to A$2,000 ($1,300)
from A$3,000, but a few months later she added up the debts in
her account and saw the limit had returned to A$3,000, the
maximum available.
    "There was no email to say, 'your credit limit's gone up
again'; it was out of nowhere," said Elliott by phone. "I don't
want to spend more than what I actually make from working."
    Elliott's experience highlights a core feature of a startup
business model that has disrupted consumer finance around the
world. But that feature and others may soon be banned in
Australia under a proposal to regulate BNPL with the same law
that covers credit card and mortgage providers.
    Whereas credit card issuers collect both interest payments
and vendor fees, BNPL companies attract users by charging
nothing for credit, instead relying almost entirely on revenue
from retailers. By monitoring users' repayment performance on
generally small balances to control risk, they require no
background checks, so signing up is easy and the companies'
costs are low.
    The absence of interest charges has exempted them from
consumer credit regulation, and the sector's business has grown
strongly during an online shopping frenzy spurred by COVID-19
stimulus payments and ultra-low interest rates.
    Now it faces a challenge as Australia, home to more than a
dozen listed providers, looks at adding protections for
shoppers. According to a discussion paper published by the
Treasury on Nov. 21, that may include bringing the providers
under the National Consumer Credit Protection Act, which bans
unsolicited credit-limit increases and requires background
checks for most consumer lending.
    Already shares of the companies, which soared in the first
two years of the pandemic, are down sharply in 2022 as investors
see BNPL users doing less shopping, and perhaps hitting trouble
in repaying balances, amid high inflation and rising interest
rates on their other debts.
    If they come under regular consumer credit regulation, they
will also lose their main competitive advantages.
    LIMIT ON CREDIT
    "What it means for the companies is, yes, it would be harder
to make money," said Jamie Hannah, deputy head of investments
and capital markets at VanEck Australia, which holds
Australia-listed shares of Block  SQ2.AX  following Block's
buyout of Afterpay this year.
    In a scenario where BNPL firms must follow the Credit Act,
"maybe the credit isn't as freely available to everyone who
would like to access it", added Hannah. "The whole thing needs
to be looked at in the current environment."
    Although Britain, the United States, which is home to BNPL
provider Affirm Holdings Inc  AFRM.O , and Sweden, home to rival
Klarna, plan to regulate BNPL, so far no country has imposed
regular consumer-credit rules on the sector.
    Afterpay, which along with other BNPL providers has until
Dec. 23 to respond to the discussion paper, said its existing
system of rewarding timely repayment with credit limit increases
and punishing late payment with credit cuts gave a more accurate
reflection of a shopper's ability to service debt than the
one-off checks required by credit-card providers.
    "We would worry that that kind of proposal would have the
unintended impact of providers not being able to start consumers
on low spending limits in the way we have done," said Afterpay
vice president of regulatory affairs Michael Saadat.
    "We want any new regulatory framework not to make it harder
for us to deliver the pro-consumer product construct that we've
had in place for many years."
    Asked about the experience of Afterpay user Elliott, a
company spokesperson said customers could always ask for their
limits to be lowered. The spokesperson did not address the issue
of limits going back up again without request.
    Number-two player Zip Co Ltd  ZIP.AX  supports regulation
and already runs a line-of-credit product that must comply with
the Credit Act, so changes requiring it to do the same for BNPL
would mean "little to no change in our procedures, depending on
how they're drafted", said the company's managing director for
Australia, Cynthia Scott.
    The Australian Securities and Investments Commission, which
oversees the Credit Act, told Reuters it was "supportive of the
BNPL sector being subject to regulation".
    The government wants the law changed by late 2023.
    FADING APPEAL
    The appeal of the industry may be dulling, anyway. 
    In every month since June, there have been fewer on-line
searches for market leader Afterpay than a year earlier,
according to research conducted for Reuters by analytics firm
SimilarWeb. Searches for Zip have been down all year.
    "It's clear that economic pressures and rising interest
rates are starting to take their toll on discretionary
spending," said SimilarWeb senior insights manager David Carr.
    Once regulation took effect, some accounts would be shut
down, said UBS analyst Tom Beadle.
    "Is it one extra account that gets shut down, or a million?"
he said. "You can't quantify that."
 (Reporting by Byron Kaye and Lewis Jackson in Sydney)
 ((byron.kaye@thomsonreuters.com; +612 9171 7541; @byronkaye;))