How long will Afterpay and Zip Co be under the legal microscope?


The rapidly emerging Buy Now Pay Later (BNPL) market is shaking the investment and spending world. What started off as a revolutionary payment solution is now gaining criticism as an unethical payment solution.

Despite each person having ‘micro debt’, which might appear okay at a surface level, if its multiplied by millions of people the ‘micro debt’ becomes an issue. According to Diane Tate, chief executive of Australian Finance Industry Association (AFIA) “approximately 30 per cent of Australian adults now use BNPL services”.

With 30% of Australian adults accumulating micro debt the problem compounds. The micro debt issue resulted in increased scrutiny from the Australian Securities Investment Commissions (ASIC), the Reserve Bank of Australia (RBA) and the Senate Economics Committee.

It is a myth that the BNPL industry was unregulated. Yes, BNPL companies, by not charging interest, were able to avoid the established regulation around credit providers. However, the BNPL industry were and still are subject to the ASIC Act 2001 and unfair contract rules.

It is more the lack of regulation around minors using BNPL, the fees for late payments and the loaning of credit to those who cannot afford it.


BNPL code of conduct

In light of the pressure the Australian Finance Industry Association (AFIA) created a ‘code of conduct’ for the BNPL industry. Which is effective on the 1st July 2020. According to Diane Tate “the draft code goes above and beyond existing laws by increasing customer safeguards”. Three key areas of the code include:


  • Late fees will be fair, reasonable and capped

Currently, if a customer cannot meet its debt payment on time then they receive a late fee. Late fees allowed BNPL companies to generate more revenue, especially as they do not charge interest. There is no universal limit for capping under the code. Instead it is up to the discretion of each company. However, Afterpay (ASX: APT) already capped late fees at 25% of the order or $68. Considering, APT is a market leader other BNPL’s will likely adopt an equal or lower cap.


  • Customers must be over 18

The main argument against BNPL is that “young people could lose control of their spending” fuelling a debt crisis. In turn, the code prohibits any BNPL from loaning credit to people under 18.


  • Companies will stop trying to sell to customers who poor credit

Another issue around the sector is the loaning of credit to customers who cannot financially afford it. Similar concept to the mortgages loan in the GFC, but on a smaller scale of course.

BNPL companies will stop marketing to customers behind on their payments, disallow additional purchases to customers who are still in debt and aid customers experiencing financial hardship.


What does this mean for BNPL giants?

The code of conduct is a step in the right direction. It will provide BNPL companies some breathing space from the constant scrutiny.

However, the positive intentions behind the code of conduct are only voluntary. Meaning compliance is an issue and the fight for legislation will continue.

Moreover, according to ASIC 1 in 6 users are financially overcommitted. This code might not solve this problem but instead get ‘people to prioritise their BNPL debt over other financial commitments’ (Consumer Action Law Centre).

Despite the code and continued pressure for legislation its likely the BNPL industry will continue to climb. Especially as customers are growing at an exponential rate. However, once legislation puts a framework on the industry a big correction will be the likely result.

Why not broaden your investors knowledge on the Payment Solutions industry by learning about After Pay (ASX: APT), Zip Co Ltd (ASX:Z1P), EML payments (ASX:EML) or Split it payments (ASX:SPT).

Here is our free, uncomplicated, and extensive ASX portfolio

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The information above should not be taken as financial advice. Youth Investment Group has no liability for personal financial interests or investment decisions. You should make your own investment decisions based upon your own research and what you believe is best for you.

Written by Patrick McLoughlin, Associate of YIG.

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