Australian regulators reclassify buy now pay later as credit under new laws

    Australia led the buy now pay later innovation and popularised the payment method globally during the pandemic outbreak. Ever since, the payment method has been used by millions of customers globally, transacting billions of dollars in value every year. The flexible payment solution is a lifeline for many even today, as rising inflation and subsequent surge in product prices in creating havoc.

    After leading innovation in the sector, Australia is now leading the way in regulating the fast-growing market. Authorities, in May 2022, announced the country will regulate buy now pay later services as consumer credit products under the new laws. It means that the new regulations would force providers to carry out checks before extending short-term loans to consumers.

    • The Australian government has been seeking to regulate the fast-growing sector for a while now. In November 2022, the Treasury released three different options for regulating the BNPL sector in Australia, which also included regulating the payment solution under the existing credit laws.
    • The move to regulate comes on the back of a litany of issues reported to the Australian Securities and Investment Commission (ASIC), which largely concentrate on the fact that unacceptable levels of unaffordable lending were taking place in the Australian BNPL sector.

    Australia, along with the United Kingdom, is among the two countries that have sought to regulate BNPL services as a standard credit product. Under the new laws, BNPL providers in Australia will not only have to get the credit license to extend short-term loans to consumers but will also put providers like Afterpay and Zip Co under the watch of ASIC.

    The regulatory proceedings are expected to hurt the operations of players like Afterpay and Zip, which are competing with conventional banking institutions to garner market share in Australia. As a part of a wider review of the sector, ASIC also revealed that it had asked Humm Group to suspend new sign-ups in Australia. While the Humm Group is cooperating with the regulators, the inability to register new users will further hurt the firm, which is already struggling amid the soaring interest rates.

    While the payment method ballooned during the pandemic outbreak and consumers in large numbers flocked towards flexible payment methods in the form of BNPL, the last few quarters have been difficult for the overall market. In Q1 2023, many of the leading names such as Affirm, Latitude, and Openpay collapsed in Australia.

    • Affirm, in March 2023, announced that the firm is quitting operations in Australia. The announcement comes a month after the firm laid off 19% of its workforce. Growing competition and a rising interest rate environment are among the factors that have forced the firm to exit Australia.
    • Latitude Group, in February 2023, also revealed that it has scrapped the BNPL offering in Australia. The firm launched LatitudePay in September 2019 when the payment method was surging in popularity among consumers. The firm cited uncertainty around the regulatory environment as the reason behind the takedown.
    • In 2023, Openpay became the first major player in the Australian BNPL market to fall, after the firm entered into receivership. Declining cash flow, increased cost of borrowings, and bad debts were among the factors that have led to the fall of Openpay in the Australian market.

    Furthermore, with the growing pressure on investors who are willing to see profits from their investments, some of the leading players like Zip are also retreating from their global expansion plans. Zip, in Q1 2023, revealed that the firm is backing down on its expansion plan, either by selling or winding down operations in 10 of the 14 global markets where it operates. The firm had already announced its exit from markets like the United Kingdom, Singapore, and the Middle East.

    Read More – Affirm losses grow in FQ3’23; firm cites bank failures and rising interest rates

    PayNXT360 expects these trends to further continue from the short to medium-term perspective, as the interest rate environment continues to dampen the margins for BNPL providers in Australia. The regulatory changes mean the compliance burden will also increase on these firms. This, coupled with the growing competitive landscape and entry of big global giants, means that the weaker names will continue to collapse in the Australian BNPL market in 2023.

    • Apple, which unveiled in Pay Later service in March 2023, has a strong presence in the Australian payments market. Apple Pay, for instance, has a strong market penetration in Australia. PayNXT360 expects Apple to build the Pay Later service on top of its Apple Pay solution. The strong market penetration in the Australian market means that Apple is set to give tough competition to market leaders such as Afterpay, Zip, and Klarna in 2023.

    Although some of the big names have collapsed in the sector and the market is projected to remain under pressure in H2 2023, the strong demand for flexible payment services means that the market will continue to grow in Australia. According to PayNXT360 estimates, BNPL payments are expected to grow by 20.5% on an annual basis to reach US$14.24 billion in 2023. The market, from 2023 to 2028, is projected to grow at a compound annual growth rate of 10.9%. As a result, the gross merchandise value will increase from US$11.8 billion in 2022 to reach US$23.93 billion by 2028.

    Read More – Klarna continues to move beyond a buy now pay later service with a suite of new feature launches in 2023

    Read More – Strategic alliances lead to new BNPL solutions in 2023

    The data indicates that there is plenty of headroom for growth in the Australian BNPL market. With the introduction of new laws, the market is also expected to grow at a sustainable pace by following the norms of responsible lending. This will also help the firms in reducing the bad debt problem, which has been long plaguing the BNPL market in Australia.