Buy now, pay later companies are completely unregulated and it's leaving Australians vulnerable, Splitit CEO Brad Paterson argues

• Several big buy now, pay later companies spent the week arguing to a Senate committee why the sector doesn't need extra oversight.

• Their draft industry code, which is voluntary and not legally enforceable, doesn't go far enough, competitor Splitit has told Business Insider Australia.

• Instead, CEO Brad Paterson argues that the sector is essentially offering unregulated credit, and that further transparency would help both consumers and existing companies.

• Visit Business Insider Australia’s homepage for more stories.

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Buy now, pay later companies have exploded quicker than anyone could have anticipated.

Flooded with companies offering the service, Australia is now grappling with how to police a unique new financial product that allows shoppers to accumulate debt. The likes of Afterpay, Zip, Humm, Payright and Openpay among others have pledged to do better, drafting an industry code of standards in lieu of actual rules, but not everyone is buying it, including a competitor which didn't sign on, Splitit.

"When I look at the code, it's a step in the right direction but it just doesn't go far enough," Splitit CEO Brad Paterson told Business Insider Australia.

Paterson's view is no doubt shaped by Splitit's own unique business model. Afterpay and others allow new purchases to be paid off in instalments, essentially lending customers the full amount at the checkout. Splitit instead allows customers to pay with a credit card, holding the full amount on their existing card and taking an instalment each month.

In other words, Splitit is just piggybacking off an existing line of credit – not creating a new one.

"Anyone who is providing credit to consumers today that they didn't have yesterday, is really providing a short term loan, and that new credit line should be governed by the same regulations that govern credit cards and other forms of credit," Paterson said. "The buy now, pay later space is not there yet."

Despite what it may claim, the buy now pay later sector is basically unregulated

Despite the reality of what buy now, pay later companies are doing – that is, issuing-point of-sale loans – none are being policed by the same laws other lenders face. In fact, some appear to be actively fighting attempts by regulators and the government to lay down the law. Splitit's product, on the other hand, is governed by existing credit card laws. Paterson believes the sector should be subject to the same credit checks and reporting as is mandated for credit card companies.

Afterpay, on the other hand, opposes that policy. For one, it would slow down its ability to quickly sign up customers. Afterpay also argues it is different in that it initially only lends small amounts to customers, unlike credit cards.

However, Paterson counters that without credit checks and regulations, customers are left vulnerable.

"I think you need to issue the same disclosures and protections to consumers. There are companies taking on the lower end of the market, a subprime market which needs credit but who aren't offered the same protections," he said. "We want everybody in the market who is issuing credit to be governed in the same way."

Afterpay is of course not alone. On Wednesday Zip co-founder Peter Gray protested there were too many regulators in a public senate hearing.

"We are currently regulated or overseen by ASIC, the ACCC, AFCA, AUSTRAC, the OAIC, APRA, Treasury, the ASX – and now, in addition, the RBA is making moves," Gray said. "With the pace of change and adoption of new technologies, we understand it is at times difficult for legislation to keep up. But how can we bridge this gap so that regulation and technology work together?"

Gray's point about the need for clarity and coordination between regulators is fair. However, any suggestion there is adequate oversight may be a stretch.

"Ultimately buy now, pay now later companies aren't regulated. The job of ASIC is to protect the rights of consumers and merchants and today, and I support it getting involved and doing that in this market as well," Paterson said. "I don't think there are too many regulators. I actually think the ones we have aren't doing enough. We need to protect the consumer."

Transparency will benefit customers and companies alike, Splitit argues

In fact, like Paterson, Gray has been active in calling for more regulation, with Zip claiming it already does credit checks and a far better track record than the poor industry average.

Where the two diverge, and indeed where Splitit again differs from the rest of the sector, is on surcharging. The RBA is currently reviewing whether BNPL companies have the right to force retailers and merchants to pay fees and not pass them on to shoppers.

"We allow merchants to surcharge and we believe everyone else in the market should as well. In saying that we need rules to ensure merchants aren't gouging customers beyond what they're paying. If we charge 1% but a retailer charges 4%, that's gouging," Paterson said. "I think there could be better monitoring around that."

Afterpay has argued that further regulation would stifle innovation, ultimately hurting Australian stock darlings that have in some cases tripled their stock price in a few short years. Paterson argues the opposite is actually true, saying the current lack of transparency in the sector is what is hurting it right now.

"I've heard the argument but transparency drives innovation in the product experience. You're much better off however if you focus on improving the product to drive loyalty, rather than monetising secret fees to fund other parts of the business," he said.

"Allowing merchants to surcharge keeps us all honest and makes sure we have to compete to provide the best possible experience to our customers. Merchants who aren't getting value will simply pass on some companies' fees in their entirety and will maybe absorb some of the cost for those companies that are worth it."

In other words, compete on a level playing field and be honest with customers.

There may be no stronger argument than that.