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Sydney, Nov 28 . When Melbourne barista Melinda Elliott had to cut back on casual work shifts this year, she asked her buy-now, pay-later (BNPL) provider, Afterpay, to lower her credit limit. She did not want debt she could not afford to repay.
The Australian company, owned by Twitter founder Jack Dorsey’s Block Inc, cut her limit to A$2,000 ($1,300) from A$3,000, but a few months later she added up the debts in her account and saw the limit had returned to A$3,000, the maximum available.
“There was no email to say, ‘your credit limit’s gone up again’; it was out of nowhere,” said Elliott by phone. “I don’t want to spend more than what I actually make from working.”
Elliott’s experience highlights a core feature of a startup business model that has disrupted consumer finance around the world. But that feature and others may soon be banned in Australia under a proposal to regulate BNPL with the same law that covers credit card and mortgage providers.
Whereas credit card issuers collect both interest payments and vendor fees, BNPL companies attract users by charging nothing for credit, instead relying almost entirely on revenue from retailers. By monitoring users’ repayment performance on generally small balances to control risk, they require no background checks, so signing up is easy and the companies’ costs are low.
The absence of interest charges has exempted them from consumer credit regulation, and the sector’s business has grown strongly during an online shopping frenzy spurred by COVID-19 stimulus payments and ultra-low interest rates.
Now it faces a challenge as Australia, home to more than a dozen listed providers, looks at adding protections for shoppers. According to a discussion paper published by the Treasury on Nov. 21, that may include bringing the providers under the National Consumer Credit Protection Act, which bans unsolicited credit-limit increases and requires background checks for most consumer lending.
Already shares of the companies, which soared in the first two years of the pandemic, are down sharply in 2022 as investors see BNPL users doing less shopping, and perhaps hitting trouble in repaying balances, amid high inflation and rising interest rates on their other debts.
If they come under regular consumer credit regulation, they will also lose their main competitive advantages.
As reported to Reuters
