SYDNEY (Reuters) – Australia said it will regulate buy-now-pay-later services as a consumer credit product under new laws, forcing BNPL providers to conduct background checks before lending in what will be one of the toughest regulations in the world. for the startup sector.

The move would put companies like Afterpay, which is owned by Jack Dorsey’s Block Inc (SQ.N), and Zip Co under the watch of the Australian Securities and Investments Commission (ASIC), Australia behind only Britain among countries that have sought to regulate BNPL as a standard credit product.

BNPL companies typically offer short-term interest-free loans on the spot with minimal credit checks that spread payments out over weeks or months and are largely used by people who are strapped for cash and taking on debt, sometimes more than they can handle.

The lack of interest charges so far has exempted BNPL providers from consumer credit regulation and the sector has seen its business boom amid the online shopping frenzy fueled by COVID-19 stimulus payments and ultra-low interest rates.

But concerns about repayment are growing as Australia battles high inflation, now at its highest level in 30 years, with Australia’s centre-left Labor government saying BNPL should be considered a credit because it has the same effect on borrowers.

“BNPL looks like credit, it behaves like credit, it carries credit risk,” Financial Services Minister Stephen Jones said in a speech in Sydney on Monday.

“Our plan is to prevent lending to those who cannot afford it, without stopping the safe and prudent use of the BNPL bank.”

Australia is home to around 12 listed BNPL providers, the data showed, and had around 7 million active BNPL accounts that resulted in A$16 billion ($11 billion) in transactions in 2021-22, up 37%.

Australians spent A$63.8 billion shopping online in 2022, with 26% of Australians saying they’ve used BNPL to pay for purchases, according to retail industry figures.

BNPL companies make most of their money charging merchants a percentage of sales revenue, in exchange for directing shoppers to them. They charge borrowers a late fee, but say they encourage on-time repayment with the promise of higher credit limits.

BNPL companies say they keep a close eye on borrower activity, but the new Australian law will require them to follow “responsible lending” obligations that include conducting credit checks before lending, notifying customers when credit limits are increased and following dispute resolution processes that are bound by law.

The government will unveil the bill for consultation later this year, and the bill will be submitted to parliament by the end of this year.

“strong first step”

An Afterpay spokesperson said the change was “a strong first step in developing a fit-for-purpose buy-now-pay-later regulatory framework”.

Peter Gray, Zip’s chief operating officer, said the change would mean “business as usual” given that the company has already complied with Australian credit law for some products.

A spokesperson for ASIC, the regulator that has advocated for the strictest possible regulation of the BNPL, was not immediately available for comment.

The Australian Financial Industry Association, which had hoped its BNPL code of conduct would form the basis for self-regulation, said it would “continue to work collaboratively with the government on the details of future regulation”.

Shares of Australia-listed BNPL providers were mixed by mid-session as investors digested the largely expected regulatory development. Shares of locally listed Afterpay owner Block fell 1.5% while shares of BNPL’s largest independent provider, Zip, fell 5%.

“The buy-now-pay-later business model remains a structural growth model,” said Sean Lear, analyst at Morningstar.

“You end up in a situation where everyone is suffering but your competitors are suffering more and the demand is still there,” Lear added.

Andrew Grant, Lecturer in Finance at the University of Sydney Business School, said the regulations “should help create transparency for credit providers in the industry, without hurting the majority of users who have significant experience with BNPL products”.

($1 = 1.4743 Australian dollars)

(Reporting by Ringo Jose in Sydney) Editing by Lincoln Feast

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