The industry
The increase of digitisation in the financial and e-commerce world has favored the strong growth of the 'Buy Now Pay Later' (BNPL), which in its traditional form consists of a short-term limited loan, through which the consumer splits the payment of a purchase into a variable number of interest-free installments. This then allows online and in-store purchases to be made without having to pay the total amount upfront. The BNPL provides numerous advantages for both consumers and merchants that other payment methods do not offer. BNPL providers generally offer a directory of online shops that allows consumers to search for and discover new and relevant merchants that may offer products and services best suited to their needs or budget. This advertising allows sellers to increase sales and average spend on their sites. The BNPL is the only payment method that allows for interest-free financing with the only additional costs that can be avoided by making payments on time.
Furthermore, in the case of non-repayment, consumers cannot spend any further funds, which allows them to reduce the risk of being exposed to expensive long-term or revolving debt.
The increase of digitisation in the financial and e-commerce world has favored the strong growth of the 'Buy Now Pay Later' (BNPL), which in its traditional form consists of a short-term limited loan, through which the consumer splits the payment of a purchase into a variable number of interest-free installments. This then allows online and in-store purchases to be made without having to pay the total amount upfront. The BNPL provides numerous advantages for both consumers and merchants that other payment methods do not offer. BNPL providers generally offer a directory of online shops that allows consumers to search for and discover new and relevant merchants that may offer products and services best suited to their needs or budget. This advertising allows sellers to increase sales and average spend on their sites. The BNPL is the only payment method that allows for interest-free financing with the only additional costs that can be avoided by making payments on time.
Furthermore, in the case of non-repayment, consumers cannot spend any further funds, which allows them to reduce the risk of being exposed to expensive long-term or revolving debt.
The global BNPL market size was worth $125 billion in 2021 and is estimated to reach an expected value of $3268 billion by 2030. The fashion and garment segment dominated the buy now pay later market in 2022 and has garnered 30.74% market share. The market is segmented into North America, Europe, Asia-Pacific, and LAMEA. North America dominated the market and generated the highest revenue in 2021, accounting for around 30.0% of worldwide sales.
The size of the Australian market
APAC is a lucrative region for BNPL growth. The high internet connectivity, low access to credit cards, and a high unbanked population make it an excellent market for BNPL fintechs looking for new revenue streams. With an expected CAGR of 33.3% (2022-2028), Asia-Pacific will experience the fastest growth in the BNPL scheme.
This is primarily due to the increased acceptance of electronic payments such as PayPal, Amazon Pay, and Google Play. As a result of these online payment options, there is speeding up the growth of the BNPL market. The growing use of online e-commerce applications has created a record-breaking market opportunity for major players. Australian consumers have been one of the early adopters of the buy now pay later (BNPL) payment method globally. The explosion in the popularity of the BNPL payment method during the global pandemic outbreak has seen many traditional financial services firms, including banks, rapidly move into the BNPL space, either in collaboration with established BNPL providers or introducing their deferred payment service, despite initial hesitancy and skepticism about these payment arrangements. Recent moves by BNPL providers, such as Afterpay, also indicate where the next growth phase of the BNPL industry may come from. The Australia-based firm, which Square has acquired, is making inroads in the physical retail segment by integrating the BNPL payment method with in-store point of sale solutions offered by Square. Amid the growing competition in the Australian BNPL industry, firms are expanding their services into new product categories to gain more traction among consumers and drive growth. BNPL payments in Australia are expected to grow 57.0% YoY to reach $22 billion in 2022 and $119 billion by 2028. In fact, $119B would represent approximately 8% of today's GDP. Furthermore, the adoption of BNPLs has helped to create or retain approximately 100 '000+ jobs across Australia.
There are many companies that offer the BNPL payment method. Among the most popular are Zip, Afterpay and Paypal.
Zip has more than 2 million customers in Australia and New Zealand. With ZipPay, there is no interest and no establishment fees. Zip also offers the ability to easily pay in-store and online wherever Visa is accepted by adding it to your Apple Pay or Google Pay account.
Perhaps the largest BNPL in Australia is Afterpay, which allows users to shop at thousands of online and offline shops nationwide. It is the app with the highest customer satisfaction and won several awards for it in 2022.
Lastly, Paypal allows customers to make online purchases in four interest-free instalments with a fortnightly due date. Not only is Pay in 4 supported by PayPal (which means you get the same security and buyer protection as with PayPal), but the service is available for use with millions of different merchants online and around the world. It also won the award for most recommended.
In addition to these, there are also Klarna, Payright, Bright and many others.
APAC is a lucrative region for BNPL growth. The high internet connectivity, low access to credit cards, and a high unbanked population make it an excellent market for BNPL fintechs looking for new revenue streams. With an expected CAGR of 33.3% (2022-2028), Asia-Pacific will experience the fastest growth in the BNPL scheme.
This is primarily due to the increased acceptance of electronic payments such as PayPal, Amazon Pay, and Google Play. As a result of these online payment options, there is speeding up the growth of the BNPL market. The growing use of online e-commerce applications has created a record-breaking market opportunity for major players. Australian consumers have been one of the early adopters of the buy now pay later (BNPL) payment method globally. The explosion in the popularity of the BNPL payment method during the global pandemic outbreak has seen many traditional financial services firms, including banks, rapidly move into the BNPL space, either in collaboration with established BNPL providers or introducing their deferred payment service, despite initial hesitancy and skepticism about these payment arrangements. Recent moves by BNPL providers, such as Afterpay, also indicate where the next growth phase of the BNPL industry may come from. The Australia-based firm, which Square has acquired, is making inroads in the physical retail segment by integrating the BNPL payment method with in-store point of sale solutions offered by Square. Amid the growing competition in the Australian BNPL industry, firms are expanding their services into new product categories to gain more traction among consumers and drive growth. BNPL payments in Australia are expected to grow 57.0% YoY to reach $22 billion in 2022 and $119 billion by 2028. In fact, $119B would represent approximately 8% of today's GDP. Furthermore, the adoption of BNPLs has helped to create or retain approximately 100 '000+ jobs across Australia.
There are many companies that offer the BNPL payment method. Among the most popular are Zip, Afterpay and Paypal.
Zip has more than 2 million customers in Australia and New Zealand. With ZipPay, there is no interest and no establishment fees. Zip also offers the ability to easily pay in-store and online wherever Visa is accepted by adding it to your Apple Pay or Google Pay account.
Perhaps the largest BNPL in Australia is Afterpay, which allows users to shop at thousands of online and offline shops nationwide. It is the app with the highest customer satisfaction and won several awards for it in 2022.
Lastly, Paypal allows customers to make online purchases in four interest-free instalments with a fortnightly due date. Not only is Pay in 4 supported by PayPal (which means you get the same security and buyer protection as with PayPal), but the service is available for use with millions of different merchants online and around the world. It also won the award for most recommended.
In addition to these, there are also Klarna, Payright, Bright and many others.
Current regulatory framework
Having considered the characteristics of the BNPL industry in Australia, it is imperative to examine the current regulation in place, as well as the regulatory options policymakers are currently considering for the future to resolve certain concerns that have been raised.
Currently, BNPL products offered by Australian companies such as Afterpay and Zip Co are not regulated under the local consumer credit laws established in the National Consumer Credit Protection Act 2009 and do not need to adhere to the responsible lending standards or other requirements of the Act and BNPL providers do not need to hold an Australian Credit Licence (ACL). This is because they fall under the specified exemptions in the National Credit Code (Schedule 1 of the NCCP Act) for certain categories of credit, such as cases in which the provider does not charge the consumer (excluding missed payment fees) or the credit is provided under the form of a continuing contract where the consumer is only charged a fixed upfront fee or periodic fee lower than a threshold amount.
Instead, the government has opted for the option of self-regulation in the form of an industry code of conduct according to which the majority of BNPL product providers are required to follow the AFIA BNPL Code of Practice, which provides some general guidelines to protect some consumer rights across the different business models adopted in the industry. Moreover, Part 7.8A of the Corporations Act of 2001 applies to these products, meaning that companies must offer fit-for-purpose products to their consumers and target the right consumers.
However, recently many consumer groups, as well as government officials, have expressed their concerns regarding this regulatory gap that could harm the financial well-being of thousands of Australians and called for stronger consumer protection due to the potential of financial distress from unaffordable loans and malicious selling practices.
Having considered the characteristics of the BNPL industry in Australia, it is imperative to examine the current regulation in place, as well as the regulatory options policymakers are currently considering for the future to resolve certain concerns that have been raised.
Currently, BNPL products offered by Australian companies such as Afterpay and Zip Co are not regulated under the local consumer credit laws established in the National Consumer Credit Protection Act 2009 and do not need to adhere to the responsible lending standards or other requirements of the Act and BNPL providers do not need to hold an Australian Credit Licence (ACL). This is because they fall under the specified exemptions in the National Credit Code (Schedule 1 of the NCCP Act) for certain categories of credit, such as cases in which the provider does not charge the consumer (excluding missed payment fees) or the credit is provided under the form of a continuing contract where the consumer is only charged a fixed upfront fee or periodic fee lower than a threshold amount.
Instead, the government has opted for the option of self-regulation in the form of an industry code of conduct according to which the majority of BNPL product providers are required to follow the AFIA BNPL Code of Practice, which provides some general guidelines to protect some consumer rights across the different business models adopted in the industry. Moreover, Part 7.8A of the Corporations Act of 2001 applies to these products, meaning that companies must offer fit-for-purpose products to their consumers and target the right consumers.
However, recently many consumer groups, as well as government officials, have expressed their concerns regarding this regulatory gap that could harm the financial well-being of thousands of Australians and called for stronger consumer protection due to the potential of financial distress from unaffordable loans and malicious selling practices.
Potential new regulation
This development should not come as a surprise, given the ongoing effort of the Reserve Bank of Australia (RBA), the Australian Securities and Investments Commission (ASIC) and the Australian Prudential Regulatory Authority to reform the broader payments system in Australia and increase efficiency in the competitive landscape with the modernisation of the Payments Systems Act of 1998.
Regarding similar issues in the broader APAC area, the Malaysian Central Bank has recently announced that it will be passing further consumer credit legislation by the end of 2022 that will include BNPL activities, while the NZ government is considering various regulations and investigating whether BNPL companies should be allowed to apply surcharges to purchases.
The Australian government has recently launched an independent inquiry open to all stakeholders to discuss and voice their concerns to determine the preferred approach of both BNPL companies and consumers. Given the popularity of BNPL products among Australians, as previously described, and the associated debt levels there has been significant participation and interest from all involved parties. The options paper published by the Treasury Department named Regulating Buy Now, Pay Later in Australia is exploring three different broad regulatory approaches to ensure the future growth of the BNPL industry and the balancing of consumer protection with access to such services. Moreover, as outlined in the paper, the new regulation should be flexible enough to allow the entry of new competitors in the market and the introduction of innovative financial products, taking into consideration the preexisting rules for comparable credit products, such as credit cards, consumer leases, small amount credit contracts (payday loans), as well as other types of personal loans. Finally, it should be practical, cost-effective, and efficient with regard to its enforcement by the ASIC to minimize any potential risk of avoidance behavior.
The first option proposes a sort of government-industry co-regulation regime in which the preexisting BNPL Industry Code is further strengthened to cover certain gaps and an affordability test is introduced before offering an individual certain types of products (e.g., a credit score will be calculated based on the overall value of the credit being requested and income/expenses information is considered in cases of “risky” borrowers). Moreover, industry players would not need to acquire an Australian Credit License or actually verify the customer’s financial situation, needs and objectives. The government would also require BNPL companies to adhere to stricter disclosure standards, however, participation in the credit reporting framework would continue to be voluntary.
The second option recommends the limited regulation of BNPL products under the Credit Act with the application of a tailored version of the RLOs and the introduction of licensing and scalable unsuitability tests. This could be supplemented by a strengthened Industry Code and would require BNPL providers to obtain a license and comply with most general obligations stemming from this qualification and assess that a BNPL credit is not unsuitable for a person using a mechanism similar to the existing RLO framework, scaled to the level of risk of the product or service.
The third and final approach would treat BNPL products similarly to any other credit product and would force them to be subject to Credit Act regulation. This could be implemented through the amendment of the Credit Act and some of the main points of this method include the requirements of operating under a license, allowing consumers to set their own spending limits, and abiding by fee caps for charges relating to missed or late payments and disclosure guidelines.
Other supplementary measures that could be adopted regardless of which option the government eventually opts for include the improvement of the financial capability of BNPL consumers through educational programmes and counseling, the additional review of Australia’s comprehensive credit reporting framework by 1 October 2024, the reinforcement of the role of ASIC as a regulator for BNPL and the introduction of payments surcharging by the Reserve Bank of Australia.
This development should not come as a surprise, given the ongoing effort of the Reserve Bank of Australia (RBA), the Australian Securities and Investments Commission (ASIC) and the Australian Prudential Regulatory Authority to reform the broader payments system in Australia and increase efficiency in the competitive landscape with the modernisation of the Payments Systems Act of 1998.
Regarding similar issues in the broader APAC area, the Malaysian Central Bank has recently announced that it will be passing further consumer credit legislation by the end of 2022 that will include BNPL activities, while the NZ government is considering various regulations and investigating whether BNPL companies should be allowed to apply surcharges to purchases.
The Australian government has recently launched an independent inquiry open to all stakeholders to discuss and voice their concerns to determine the preferred approach of both BNPL companies and consumers. Given the popularity of BNPL products among Australians, as previously described, and the associated debt levels there has been significant participation and interest from all involved parties. The options paper published by the Treasury Department named Regulating Buy Now, Pay Later in Australia is exploring three different broad regulatory approaches to ensure the future growth of the BNPL industry and the balancing of consumer protection with access to such services. Moreover, as outlined in the paper, the new regulation should be flexible enough to allow the entry of new competitors in the market and the introduction of innovative financial products, taking into consideration the preexisting rules for comparable credit products, such as credit cards, consumer leases, small amount credit contracts (payday loans), as well as other types of personal loans. Finally, it should be practical, cost-effective, and efficient with regard to its enforcement by the ASIC to minimize any potential risk of avoidance behavior.
The first option proposes a sort of government-industry co-regulation regime in which the preexisting BNPL Industry Code is further strengthened to cover certain gaps and an affordability test is introduced before offering an individual certain types of products (e.g., a credit score will be calculated based on the overall value of the credit being requested and income/expenses information is considered in cases of “risky” borrowers). Moreover, industry players would not need to acquire an Australian Credit License or actually verify the customer’s financial situation, needs and objectives. The government would also require BNPL companies to adhere to stricter disclosure standards, however, participation in the credit reporting framework would continue to be voluntary.
The second option recommends the limited regulation of BNPL products under the Credit Act with the application of a tailored version of the RLOs and the introduction of licensing and scalable unsuitability tests. This could be supplemented by a strengthened Industry Code and would require BNPL providers to obtain a license and comply with most general obligations stemming from this qualification and assess that a BNPL credit is not unsuitable for a person using a mechanism similar to the existing RLO framework, scaled to the level of risk of the product or service.
The third and final approach would treat BNPL products similarly to any other credit product and would force them to be subject to Credit Act regulation. This could be implemented through the amendment of the Credit Act and some of the main points of this method include the requirements of operating under a license, allowing consumers to set their own spending limits, and abiding by fee caps for charges relating to missed or late payments and disclosure guidelines.
Other supplementary measures that could be adopted regardless of which option the government eventually opts for include the improvement of the financial capability of BNPL consumers through educational programmes and counseling, the additional review of Australia’s comprehensive credit reporting framework by 1 October 2024, the reinforcement of the role of ASIC as a regulator for BNPL and the introduction of payments surcharging by the Reserve Bank of Australia.
Different Views & Most Likely Scenario
Unsurprisingly, different parties hold different views about which option is the most effective. In detail, a coalition of consumer groups including Financial Counseling Australia, the Consumer Action Law Centre, and Choice argue that BNPL providers should be regulated like any other credit product, as in the last option and that partial or self-regulation would not be enough. On the other hand, the managing director of Zip, Cynthia Scott, released a statement in which the company advocated for the credit check requirement and stated that even though it would “be comfortable” with any of the three regulatory proposals, the least strict one would provide sufficient protection since the level of exposure is considerably lower than that of a credit card. Finally, the CEO of the Australian Finance Industry Association, Diane Tate, stated that the association is not opposed to increasing regulation in the BNPL industry, without expressing their support for a specific option. Even though only time will tell which of the three frameworks will be adopted by the Australian government, given the current credit environment and the exposure of many individuals, the most likely scenario is the most strict one that proposes the regulation of BNPL products under the Credit Act.
Unsurprisingly, different parties hold different views about which option is the most effective. In detail, a coalition of consumer groups including Financial Counseling Australia, the Consumer Action Law Centre, and Choice argue that BNPL providers should be regulated like any other credit product, as in the last option and that partial or self-regulation would not be enough. On the other hand, the managing director of Zip, Cynthia Scott, released a statement in which the company advocated for the credit check requirement and stated that even though it would “be comfortable” with any of the three regulatory proposals, the least strict one would provide sufficient protection since the level of exposure is considerably lower than that of a credit card. Finally, the CEO of the Australian Finance Industry Association, Diane Tate, stated that the association is not opposed to increasing regulation in the BNPL industry, without expressing their support for a specific option. Even though only time will tell which of the three frameworks will be adopted by the Australian government, given the current credit environment and the exposure of many individuals, the most likely scenario is the most strict one that proposes the regulation of BNPL products under the Credit Act.
Regulations’ impacts on markets and conclusions
The reaction of markets to the news of the government’s consultation in June was observed for a number of BNPL firms. Specifically, three firms experienced a decline: Sezzle, Zip and Openpay. Sezzle was trading at .49 on June 7th and dropped to .26 by the end of the month following the news and has traded back to its starting point over the course of this year, but well below its high of 3.96 at the beginning of the year. Zip was trading at .77 on June 7th and dropped to .44 by the end if the month following the news and has traded back to its starting point over the course of this year, but still well below its high of 3.85 at the beginning of the year. Finally, Openpay was trading at .21 on June 7th and dropped to .12 by the end of the month following the news and has traded back to its starting point over the course of this year, but once again well below its high of 2.31 at the beginning of 2022.
Looking forward, BNPL sector in Australia is likely to see more mergers and acquisition deals since firms consolidate to survive the increased competition and rising interest rates. As firms begin to face higher financing costs for borrowing funds, their margins from providing interest-free installment loans to consumers at the point of sale will decline.
Furthermore, the strong revenue growth achieved by the BNPL sector over the last two years has attracted investments from global tech giants such as Apple Inc. and PayPal Holdings Inc., which will likely begin to crowd out smaller BNPL firms. As a result of this, it is likely that a number of the smaller firms and startups will either be purchased or possibly go bankrupt without the ability to raise more funding. Finally, the consultation seems likely to put more guardrails in place, which could potentially limit the number of new customers while treating BNPL firms similar to traditional credit products. In this context, we would expect BNPL public stocks to continue to be subject to volatility in the short term until markets can seize the impact of regulation on their future earnings.
The reaction of markets to the news of the government’s consultation in June was observed for a number of BNPL firms. Specifically, three firms experienced a decline: Sezzle, Zip and Openpay. Sezzle was trading at .49 on June 7th and dropped to .26 by the end of the month following the news and has traded back to its starting point over the course of this year, but well below its high of 3.96 at the beginning of the year. Zip was trading at .77 on June 7th and dropped to .44 by the end if the month following the news and has traded back to its starting point over the course of this year, but still well below its high of 3.85 at the beginning of the year. Finally, Openpay was trading at .21 on June 7th and dropped to .12 by the end of the month following the news and has traded back to its starting point over the course of this year, but once again well below its high of 2.31 at the beginning of 2022.
Looking forward, BNPL sector in Australia is likely to see more mergers and acquisition deals since firms consolidate to survive the increased competition and rising interest rates. As firms begin to face higher financing costs for borrowing funds, their margins from providing interest-free installment loans to consumers at the point of sale will decline.
Furthermore, the strong revenue growth achieved by the BNPL sector over the last two years has attracted investments from global tech giants such as Apple Inc. and PayPal Holdings Inc., which will likely begin to crowd out smaller BNPL firms. As a result of this, it is likely that a number of the smaller firms and startups will either be purchased or possibly go bankrupt without the ability to raise more funding. Finally, the consultation seems likely to put more guardrails in place, which could potentially limit the number of new customers while treating BNPL firms similar to traditional credit products. In this context, we would expect BNPL public stocks to continue to be subject to volatility in the short term until markets can seize the impact of regulation on their future earnings.
By Federico Tita, Alexander Lockhart, and Stergios Mastoris
Sources
- Norton Rose Fulbright
- The Guardian
- ABC News
- Reuters
- Australian Government - The Treasury