Afterpay flags potential credit checks as regulation looms

Afterpay has opened the door to conducting credit checks on some customers as it prepares for regulation of buy now pay later products (BNPL), but it argues that treating the sector the same way as credit cards would be excessive.

As the government consults on regulating the BNPL sector, which falls outside credit laws, consumer groups and some banks have called for Afterpay and its industry rivals to be treated in the same way as traditional credit product providers.

Afterpay says credit checks could play a role for customers with limits above $1000.
Afterpay says credit checks could play a role for customers with limits above $1000.Credit:Matt Davidson

Currently, customers opening an Afterpay account receive an initial spending limit of $600, without the company conducting a credit check, and without the customer providing details of their income or expenses. Limits can be increased as customers show they can make repayments, to a maximum of $3000.

Afterpay’s international head of public policy, Michael Saadat, said the company already conducted credit checks in the United States, and the process could signal if a customer might be financially vulnerable. He said credit checks, which can be carried out almost instantly, could play a role in Australia for customers with limits of more than $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,” he said.

The company did not support changes that would require BNPL firms to assess customers’ income or expenses, he added.

“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.

Afterpay is the country’s biggest provider of BNPL loans, which allow consumers to pay for purchases over four interest-free, fortnightly instalments.

It made the comments in response to federal Treasury consultation on BNPL regulation, which has suggested three options for the sector. They include: stronger self-regulation; limited regulation under the Credit Act; and more comprehensive regulation under the Credit Act.

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Consumer groups and some banks, including Westpac, have backed the third option.

A submission from an alliance from consumer groups said: “Both options 1 and 2 would create a bespoke form of regulation for BNPL. Not only would this increase regulatory complexity, it would leave in place a number of the very legal loopholes that have allowed BNPL products to emerge.”

The Commonwealth Bank has said it supports a “pragmatic” approach, in which BNPL providers would licensed under the Credit Act, and required to assess the suitability of lending and engage with credit bureaus.

The Australian Retail Credit Association, which represents banks, credit unions and consumer finance companies, has also backed the third option, but said rules could be “fine-tuned” for small BNPL accounts.

In contrast, Afterpay’s submission said it supported the first option and aspects of the second, including mandating the BNPL Code of Practice for all providers, and potentially requiring BNPL firms to have a credit licence.

The company, which is owned by US fintech giant Block, told Treasury that Afterpay had lower loss rates than traditional credit products, such as credit cards.

Saadat also said BNPL was fundamentally different to credit cards, which often charge interest rates of about 20 per cent, and said banks were trying to protect the high profits they made from credit card lending.

To support its push for lighter regulation, Afterpay released the findings of a survey of 1000 consumers it commissioned. The survey found 85 per cent of respondents preferred rapid checks of a customer’s credit score, rather than “time-intensive” checks.

Afterpay’s opposition to the third option is consistent with the views of industry lobby groups Fintech Australia and Tech Council of Australia.

Financial Services Minister Stephen Jones told this masthead earlier this month that BNPL regulation would be settled by the government this year.

“All the serious players in the industry recognise that some form of government regulation is desirable, the only question for us is where we get the balance right,” Jones said.

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Source: Thanks smh.com