The government is in the process of regulating buy-now-pay-later (BNPL) services under the Credit Act and is forcing companies like AfterPay to comply with a set of responsible lending obligations.

Financial Services Secretary Stephen Jones said on Monday he wanted to preserve innovation and competition in the marketplace, but stop the “damaging effects of bad marketing and bad lending practices”.

“There is evidence that multiple accounts have been sold to people who simply can’t pay them, people are missing essential payments, people are going without so they buy now, pay later and make other credit payments.” he said.

“We don’t want to make things harder for people who use buy-now-pay-later as it’s meant to be, but we do want to make sure that this form of consumer credit is regulated in a way that makes it safe and secure. affordable to use.”

BNPL providers provide a line of credit to customers who pay for products with a range of interest-free loans. Retailers pay fees to the likes of Afterpay and Zip to use BNPL in their stores and drive sales.

There have long been concerns about the impact of unregulated, easily accessible credit on consumers, but the previous government left the industry to self-regulate with a voluntary code of conduct.

At the end of last year, the new government offered three options for regulating BNPL. One option was to continue self-regulation, but with a stronger code of practice, and another option was to treat BNPL like any other credit service.

The government has opted for a different option: bringing BNPL providers under the Credit Act by requiring them to either have a credit license or represent a licensee and thus comply with general credit obligations.

“Our legislation ensures that obligations for BNPL providers are scalable and technology neutral,” said Jone. “We will make sure they are appropriate for the risk level of their products.”

Consumer advocacy group Choice welcomed the regulation, but wants to ensure that the government adequately protects vulnerable Australians.

“We need to remember how we got into this mess — loopholes in our credit laws that allowed an entirely new type of credit to emerge without proper regulation,” said Alan Kirkland, CEO of Choice.

“The government must resist pressure from industry to build carve-outs into these new laws.”

Choice’s own research found that a quarter of BNPL users have cut back on essentials to pay their debts.

Further investigation into the sector has shown that credit services are contributing to the financial problems.

In a 2021 survey of financial advisers, Financial Counseling Australia found that more than half of them had noted that BNPL become a source of stress among customers, with many not considering it a debt and not reporting BNPL debt as a liability.

Australian payments company Frollo has found, based on an analysis of customer data, that the use of BNPL is increasing along with prepayment services and that almost a quarter of BNPL users pay off their BNPL debt with a credit card.

“The majority of BNPLs and payment advances do not perform credit checks or report debt to credit bureaus,” said Frollo chief customer officer Simon Docherty.

“Consequently, these ‘invisible debts’ make it difficult for other lenders to assess a borrower’s ability to repay, potentially leading to loans to those who cannot afford it.”