Will BNPL share prices rise or dive under new consumer regulation?

The introduction of greater transparency requirements for Australia's buy-now-pay-later (BNPL) mstkry could have a significant impact on ASX-listed platforms in the sector.

These impacts could vary, however, depending on how individual platforms respond to the new regulatory mandates, which could also have the effect of improving the health of the market by improving consumer trust.

Treasury demands greater transparency from BNPLs

Treasury recently released draft amendments to the National Consumer Credit Protection Act, in a bid to provide greater protection to finance consumers who make use of BNPLs.

The reforms seek to create 'appropriate and proportionate' guardrails for the conduct of BNPLs, including measures to prohibit deceptive conduct by platforms.

The move arrives in response to calls for greater regulation of the BNPL market - a sector driven by online technology that seeks to use fintech innovations to make credit more accessible to a broader range of consumers.

The BNPL market has seen strong growth since the Covid pandemic, with a survey from the Reserve Bank of Australia (RBA) finding a surge in usage amongst younger Australians, who are likely to be more vulnerable to disingenuous or unfair lending practices.

The survey released in November 2023 found that over 40% of Australians aged 18 to 39 had made use of instalment loans over a year-long period, for a rise of 8 percentage points compared to 2019, just a year prior to the pandemic.

This surge in usage prompted calls at the start of last year from consumer protection groups for heavier protection.

In February 2023, the Australian Securities and Investments Commission voiced its support for the regulation of BNPL products under the National Credit Act.

According to Alan Kirkland, chief executive of consumer group Choice, the announcement was a breakthrough development, marking the first time ASIC had called for BNPL products to be considered a form of credit.

Treasury said its draft reforms seek to address a range of concerns raised by consumer groups in relation to BNPL business practices.

According to the proposed reforms, the key concerns that have been identified mainly relate to 'unaffordable lending practices, unsatisfactory complaint resolution and hardship assistance, the charging of excessive late payment fees, and a lack of transparency surrounding product disclosures and warnings.'

Stronger regulation could be a boon for reputable BNPLs

While at first blush it may appear that heavier regulation of the BNPL sector could put the brakes on growth, it could also have the effect of improving the fortunes of reputable platforms who play by the rules.

In any sector of the economy, apt regulation can have the effect of improving the functioning of the market by providing greater levels of trust and protection for consumers.

Companies that are licensed and in full compliance with requirements stand in particular to benefit from a stronger regulatory regime. Stricter enforcement could weed out competition from platforms that play more loosely with the rules, while the ownership of a license can improve market standing and potentially attract more consumers.

Key players in the industry itself have issued calls for appropriate levels of regulation that protect consumers while still leaving breathing room for efficiency-enhancing innovations.

These include Afterpay (ASX: APT) which has consistently advocated for 'fit-for-purpose' regulation of BNPL operations in Australia.

'While Afterpay already has many safeguards and customer protections in place, we welcome the opportunity for the industry to set high standards for lending' Afterpay said in a statement.

Zip (ASX: ZIP) also supported the Treasury's proposed reforms, with a spokeswoman stating that the company 'takes its responsible lending obligations very seriously and conducts ID, credit and affordability checks on its customers.'

Both Afterpay and Zip, two of the largest BNPL companies on the Australian market, are current holders of credit licenses.

Humm (ASX: HUM), another major ASX-listed BNPL platform laying claim to 2.7 customers in Australasia, the UK and Ireland, is also a holder of a credit license in Australia.

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