A world-first code of practice for the burgeoning Buy Now Pay Later industry came into effect in Australia today, aiming to strengthen best practice for a sector under growing scrutiny.

Drafted by the Australian Finance Industry Association and its members like Afterpay, Zip, Klarna and Humm, the code sets out obligations for things like late payment fee caps and background checks.

But consumer welfare groups are warning the BNPL code will not stop the harm the payment method is causing consumers, and the sector needs to be externally regulated like credit.

Booming BNPL

Buy Now Pay Later is an increasingly popular payment option that allows consumers to split up and defer payments until after they receive a good or service.

Consumers pay late fees if they miss payments rather than intrest. Merchants typically also pay a fee of three to six per cent of the transaction to BNPL providers to include the option which reduces friction at the checkout. 

Because of BNPL providers don’t chard a fee for credit to consumers they have been exempts from traditional Australian consumer lending regulation as they are not viewed as loans. 

Consumers are still flocking to the new digital payment.

The total amount of credit extended in the buy now pay later industry has almost doubled in the 12 months to November 2020, when ASIC gave its latest update on the sector.

The corporate regulator found late fee revenue for BNPL providers is also rising rapidly as one in five consumers are missing payments. Some users are also experiencing financial hardship, taking out other loans and even missing meals in order to make BNPL payment, according to ASIC.

Consumer welfare groups have warned they are witnessing similar consequences from BNPL.

“As this industry continues to grow, we will see increased debts and increased financial hardship,” says Financial Rights Legal Centre CEO Karen Cox.

 “Sadly, many people including Aboriginal and Torres Strait Islander people who are lured into BNPL are becoming embroiled in unsustainable, long-term debt. BNPL companies use a simple but seductive psychological trick to attract customers. Spreading out the cost of an item makes it feel less expensive, but that doesn’t mean you can afford it.”

New code  

Cox is part of a cohort of consumer groups that are calling for the BNPL sector to be externally regulated like credit.

Last week, when the industrycode was first released, the group called on the Federal Government to follow the UK and regulate the sector under Australian credit laws.

“If it looks like a duck and quacks like a duck, it is a duck. We should ditch ideology and recognise that BNPL is credit and should be regulated like other credit. If we fail to act, more and more Australians will be harmed,” said Financial Counselling Australia CEO Fiona Guthrie.   

“Take Susan*, a client of a financial counsellor who was spending 40% of her income on BNPL debts and didn’t have enough money left for day to day living expenses, including rent. Or John, a pensioner with early signs of dementia who was signed up to $14,000 of dodgy solar panels using BNPL when a salesman called at his home.”  

The BNPL industry insists, however, that a self-regulation model can work and burdensome compliance would stymy their innovation. 

From Monday the AFIA’s code of practice is in effect and applies to its “code compliant” BNPL members – currently, afterpay, brighte, humm group, the commbank backed Klarna, Latitude, openpay, payright and zip.

Version 1 includes a member commitment to be upfront with consumers and not to take advantage of vulnerable people. It includes commitments to cap late fees which must be “fair” and reasonable”, and come with appropriate notice.

The code also includes conditions for assessing the suitability of customers, although the more robust checks only kick in for purchases above $2,000.

“The Code is explicitly consumer focused and has nine commitments that signatories make directly to the people that use their products and services,” said AFIA CEO Diane Tate.

Tate said it is mandatory for all providers to be members of the external dispute resolution service – the Australian Financial Complaints Authority (AFCA).

In October BNPL firms will also be subject to ASIC’s design and distribution obligations, which will require the industry to design fit-for-purpose products that meet consumer needs. Providers will also need to take steps to ensure their products are reaching the right consumers.

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