Afterpay says credit checks may have a role to play in BNPL but remains critical of regulation

Calls for regulation and credit checks on Buy Now Pay Later (BNPL) products have been rife in Australia for a number of years now. But as the conversation heats up, it seems that Afterpay may be finally willing to come to the table.

BNPL platforms have received backlash ever since they first entered the market. Allowing users to purchase products and pay for them later, with interest, they have often been criticised for being a financial risk for young and at-risk consumers in particular.

Afterpay and other BNPL products aren’t regulated

Unlike credit cards, BNPL products such as Afterpay and Zip don’t require credit checks to sign up. They aren’t regulated under the Credit Act, meaning they aren’t subject to responsible lending standards.

According to research for Australian fintech Frollo, its users spend an average of $452 per month in Q4 of 2022 on BNPL, including repayments, fees and penalties.

It also found that BNPL users were 43% more likely to use Pay Advance services. This allows users to receive part of their pay immediately rather than waiting until payday. There are, of course, interest fees attached to these services.

The Australian Finance Industry Association (AFIA) also released a report in 2022 that found there were 5.9 million active BNPL accounts across Australia.

While these products are still in their infancy compared to credit cards, this is still a significant number and it’s no wonder that Treasury, industry bodies and financial institutions are keen to bring in regulation.

Is regulation on the way?

In November 2022, Treasury opened up submissions for the future regulatory framework of BNPL products in Australia.

Three regulatory options were presented, including more detailed user credit checks.

• Option 1: Strengthening the BNPL Industry Code plus an affordability test. This option will impose a bespoke affordability assessment for BNPL providers under the Credit Act and address any other regulatory gaps in a strengthened Industry Code to make it fit-for purpose;
• Option 2: Limited BNPL regulation under the Credit Act. This approach would require BNPL providers to obtain and maintain an ACL, plus introduce modified Responsible Lending Obligations (RLOs) under the Credit Act to determine unsuitability, combined with a strengthened Industry Code; or
• Option 3: Regulation of BNPL under the Credit Act, with full RLOs. Under this option, BNPL providers would need to obtain and maintain an ACL. The existing RLOs in the Credit Act will be applied to all BNPL credit, including requirements around reasonable inquiries into

At the present time, Afterpay and similar brands do not require credit checks from their customers. Instead, they offer a smaller credit limit of around $600 before removing the limit if repayments have been occurring. The maximum this goes up to is $3000.

Afterpay says credit checks aren’t just about consumer protection

As per the Sydney Morning Herald (SMH), Afterpay has now said credit checks could be something the company would consider for customers with limits over $1000.

“I think we recognise that credit checks have a role to play, we just don’t agree with some of the sentiment expressed by others that credit checks and the credit reporting system are somehow a panacea, and a sort of fundamental part of consumer protection,” Michael Saadat, Afterpay’s international head of public policy, said in response to the Treasury’s consultation paper.

It’s worth noting that Afterpay does utilise credit checks in the United States. However, the company still does not agree that BNPL platforms should be subjected to potential Australian regulations that would require credit checks for all customers.

“If we’re designing a framework that has consumers in mind, I think consumers would say that it really is disproportionate to be asking for their income and expenses when they’re being provided with an Afterpay product that gives you a $600 up-front spending limit,” Saadat said.

According to the SMH,  the Australian Retail Credit Association and the Commonwealth Bank also support this third regulatory option. However, the former said that it could be “fine-tuned” for smaller BNPL accounts.

Saadat is also said to have argued that BNPL products are different to credit cards due to the lower interest rates and that banks were backing this third regulatory option to protect their credit card lending profits.

“Afterpay’s customer risk assessment uses new technology and design principles. All purchases using Afterpay are assessed using advanced fraud and real-time repayment capability checks at the time of each and every order. Unlike for credit cards, we do not make one-off decisions to approve customers with large spending limits,”an Afterpay spokesperson said in an email to SmartCompany.

Afterpay also stated that it doesn’t provide customers with a high upfront spending limit and that their first repayment must be paid upfront.

“Our current model exposes customers to the lowest possible risk.”

The spokesperson also reiterated that Afterpay caps its late fees “and we don’t allow customers to revolve in debt. If customers do not want the higher limit that’s earned over time, they can contact customer service and lower the limit.”