The Australian government on Wednesday unveiled legislation that would impose stricter regulations on the rapidly expanding buy-now-pay-later (BNPL) industry.

The proposed laws aim to mandate credit checks on borrowers, aligning the sector with other consumer credit products.

BNPL companies, particularly popular among younger generations, typically offer interest-free short-term loans with minimal credit checks, allowing customers to spread payments over weeks or months. However, concerns have arisen about individuals taking on more debt than they can afford.

Until now, the BNPL sector has avoided the stringent rules that apply to credit card providers, as these firms generate most of their revenue through merchant fees rather than interest payments.

Under the new legislation, BNPL providers would be required to obtain an Australian credit licence, placing them under the scrutiny of the Australian Securities and Investments Commission (ASIC), the corporate regulator.

"If it looks and acts like credit, then it should be regulated as such," remarked Minister for Financial Services, Stephen Jones, in a statement. The proposed laws would establish a new "low-cost credit" category to reflect the lower risk and cost associated with BNPL compared to other regulated forms of credit.

The BNPL business experienced a surge during the COVID-19 pandemic, fuelled by an online shopping frenzy and stimulus payments amid ultra-low interest rates. However, as Australia grapples with persistent inflation, concerns over repayments have been mounting.

Australia, home to about a dozen listed BNPL providers, had approximately 7 million active BNPL accounts – mostly younger people under the age of 25 – with an average transaction amount of A$136, based on treasury data released last year.

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