- ASIC's latest responsible lending guidelines have suggested to lenders that "unregulated" buy now, pay later (BNPL) services are red flags to look for when considering an application.
- The wording indicates BNPL customers may face greater scrutiny when applying for a loan in 2020, with ASIC saying they may pose a "higher risk".
- It's the latest signal from the regulator's attitude towards the services, possibly indicating greater scrutiny in 2020.
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If you use buy now, pay later (BNPL) services like Afterpay and Zip, it could be about to become a lot harder for you to take out a loan.
In its latest responsible lending guidelines, which instruct banks and other lenders as to what appropriate approvals look like, ASIC has made multiple references to the BNPL sector.
The reference most likely to concern the likes of Afterpay is one warning of the risk of consumer harm these services pose, describing them as a potential 'red flag', alongside multiple credit cards or personal loans. ASIC goes on to describe the buy now, pay later sector as a form of "unregulated credit". Companies like Afterpay are notably reluctant to describe their products as credit.
While lenders aren't explicitly instructed to decline applicants with a BNPL history, they are urged to consider the risks. ASIC provides an example to highlight this point, in which 'Chanthavy' applies for a $20,000 secured car loan. While her credit score and history are good, she has two credit cards near their maximum limits and uses several buy now, pay later services.
ASIC instructs lenders to treat such applicants as "higher risk", possibly "operating at the margins of [their] available income" and implores the lender to go deeper on their financial situation to consider if they can make loan repayments.
With more than 1.5 million Australian BNPL users, the move could have serious ramifications, particularly when considering BNPL users are overwhelmingly young Australians – a demo which has long-bemoaned being priced out of the capital city housing market. Research house Roy Morgan estimates more than a third of customers are under 28 years of age, and more than three-quarters under 44.
It's not the first time the space has caught the ire of the regulator. Late last year, ASIC released its first review finding the services "can cause some consumers to become financially overcommitted and liable to paying late fees". It also highlighted its concern surrounding the especially young demographics attracted to companies like Afterpay.
Likewise, co-founder of buy now, pay later company Zip Peter Gray has called for the bar to be lifted closer to Zip's standards.
"Buy now, pay later is a unique sector that needs unique regulation," he told Business Insider Australia. "We would not support simple and transparent modern cost of living solutions being regulated out of existence because we’re forced to do business the way the big banks do. We're trying to fix the models that the big banks have implemented."
He disagrees that buy now, pay later customers pose an inherent credit risk.
"Because of our focus on and commitment to responsible lending, Zip customers are demonstrating superior repayment behaviour with just 1 in 100 customers late in any given month, compared to more than 1 in 6 credit card users struggling to repay their debts," Gray said.
He has previously suggested that Zip would like to see "a cut-down version of responsible lending" to lift the industry's minimum standards. Specifically, Gray said he'd like to see competitors conduct greater financial checks on customers and stop credit cards being used from making repayments.
Where he draws the line however is when it comes to the issue of surcharging. At present, BNPL companies don't allow merchants and retailers to pass on the cost of the service to customers. ASIC is currently conducting a review into that practice.
Afterpay has been contacted for comment.