Issues continue to dwell for Buy Now, Pay Later (BNPL) services, and innovator Klarna is in the hot seat. We covered this topic last week. We mentioned operational issues with BNPL in Australia, where liabilities were showing to exceed assets for Klarna Australia. To help combat this issue, the Australian Treasury is working to release a paper in the next coming weeks. The paper will propose three regulations aimed to better protect consumers. Weighing in on operational issues is not new to the Australian market, and it might bring you back to 2000, when the Australian Competition and Consumer Commission took action on credit card interchange.
BNPL Regulatory Rules
The regulator rules on BNPL are quirky. If you don’t charge interest, the regulatory requirements are fuzzy. Currently, BNPL providers are exempt from Australian regulations because they don’t necessarily follow a true lending pattern. BNPL providers don’t charge their customers interest to “borrow” money; therefore, they’re not lending credit. You might ask, “How do BNPL players make their money?” There are two revenue streams involved: fees paid by merchants to accept these payments and late fees paid by consumers when they miss an installment. The merchant fees are similar to interchange, but are called merchant fees instead. Really, it is a horse of a different color.
An article from News.com.au shares the first regulatory solution: “Financial Services Minister Stephen Jones said he wanted BNPL services to be treated like other credit products under Australian law.”
Standard Credit Product?
Treating BNPL as a standard credit product would entail complete credit checks as opposed to soft credit checks. There’s good reason for this; the intention is to ensure consumers who utilize BNPL can fund their future installments. However, this is something many customers may shy away from. Do you want your credit dinged for funding a $200 purchase? I wouldn’t. As Mercator previously pointed out, BNPL reporting should not be a new revenue stream for credit bureaus.
Surely this solution will further decrease the use of BNPL. The convenience of quickly financing at the point-of-sale provided by BNPL would be eliminated if a customer needed to wait for a complete credit check to proceed with the purchase. Why go through the pain of waiting for a credit check when you can simply opt out for a credit card at that point? Let’s keep our fingers crossed for the other two regulatory ideas coming out from the Australian Treasury.
The big question for fintech BNPL is how will the business survive, with challenges to credit quality and the business model.
Overview by Sophia Gonzalez, Research Analyst, Debit Advisory Service at Mercator Advisory Group.