The Australian Finance Industry Association (AFIA), an industry trade group, released the first version of self-regulations on the Buy Now Pay Later industry. The association includes many financial institutions, most BNPL lenders, and a wide array of fintechs. The full text of the document is here.
Participating BNPL, including Afterpay, Brighte, Humm Group, Klarna, Latitude, Openpay, Payright, and Zip, are highlighted on the AFIA website as code-compliant members. According to the full text, “The commitments in this Code are intended to be best practice, and we will monitor domestic and international developments to ensure they remain best practice. The Code does not supersede any upcoming regulatory requirements. Rather it will “operates alongside, and is subject to, existing laws and regulations and does not limit your rights under such laws and regulations.”
The objective is “fair, honest, and ethical” behavior.
Section 11 outlines the requirement for upfront assessment of new borrowers, including compliance with Anti-Money Laundering, a hot spot in many markets. There is an ability to repay check-in clause 11.4, but lenders may rely on customer data or find it through a third-party source.
Although the sweet-spot for BNPL is between $100 and $700, borrowers will find more rigorous checking for BNPL loans between $2,001 and less than $30,000 (AUD) [Note, 1 AUD = 0.78 USD]. There is a standard complaint process found in Section 13. Section 14 lays out requirements for hardship assistance, which promise compassion for vulnerable groups, including those with “mental health or domestic and family violence concerns.”
Later in Section 14 is the collection strategy, which provides an easy out for debt sales in section 14.19, where it says, “We will not sell your debt to debt collectors unless: (a) You have missed, or are late in making, a payment under our contract; (b) We have given you written notice of the default (may be sent electronically) and a reasonable opportunity to remedy the default, and (c) You have not remedied the default within our stated time period.”
Where we did not see a strong play is in responsible lending. Right now, investors pile in billions of dollars into the BNPL model, and default rates are through the roof. We identified this issue in December, where the Australian Securities and Investment commission indicated: “With fully 20% of consumers in a delinquent status, many seem to fall into the category of those who cannot pay or lack the experience and commitment to manage household budgets.
The new guidelines provide a good baseline, yet it needs to address lending quality. Lending quality is one of the reasons financial institutions step into this market slowly. And like it or not, lenders must help keep borrowers out of financial trouble, like it or not.
One way to achieve better lending quality is to require hard, not soft credit bureau pulls to mark customer activity. With this, lenders can avoid over-lending to ensure the consumer is not burdened with carrying a wide array of BNPL loans.
I personally took out 5 BNPL loans without an impact on my FICO score. (this document explains four consumer experiences, and I recently did another at Klarna). They worked well, but shouldn’t there be some protection for the average consumer?
Overview by Brian Riley, Director, Credit Advisory Service at Mercator Advisory Group