BNPL to face new regulations under payment reforms

Treasurer Josh Frydenberg has declared plans to reform Australia’s payments system, to adjust for a wave of new technologies, from digital wallets to cryptocurrencies and buy now, pay later (BNPL).

In an address to the Australia-Israel Chamber of Commerce in Melbourne, Mr Frydenberg stated the trend towards digital payments will only accelerate, noting there are more than 5 million active BNPL customer accounts.

Further, around 55 million non-cash payments totalling approximately $650 billion are made each day in Australia – from online purchases, to tap and go, to bank account transfers. BNPL accounts for around 20 per cent of online retail transactions by value.

At the same time, the use of cash has fallen from around 69 per cent of payments in 2007, to 27 per cent in 2019.

“Despite this disruption, the regulatory framework governing the payments system has remained largely unchanged over the last 25 years,” Mr Frydenberg said.

“Given the pace of change and those leading it, if we do not reform the current framework it will be Silicon Valley that determines the future of our payments system. A system that represents a critical piece of our economic infrastructure.”

The government’s new reform plan has taken findings from the government-commissioned Farrell Payments System Review, the Senate select committee on Australia as a technology and financial centre (formerly the Senate’s fintech committee) and a parliamentary inquiry into mobile payments and digital wallets.

Each of the reviews found Australia’s payment system needed to be modernised to protect consumers, help drive innovation and spur competition, especially for services like BNPL.

Without intervention, the government fears Australian businesses and consumers could increasingly transact in environments that are largely unregulated from a local perspective, with rules determined by foreign governments and large multinationals, including tech giants.

At the core of the government’s reforms plan, is the aim to centralise oversight of the payment system, by making sure government plays a greater role, including enhanced intervention powers for the Treasurer.

Consultation on the suggested reforms will begin in early 2022, including an exploration of how to appropriately treat BNPL in a way that best promotes competition and innovation.

By mid-2022, the government has aimed to have set out a strategic long-term plan for the payments system, developed with industry and reviewed annually as well as settle the details of additional powers for the Treasurer to set payment system policy.

The mid-2022 deadline has also been applied to determining the changes necessary to modernise the payments system legislation to accommodate new systems, such as BNPL and digital wallets.

By the end of 2022, the government has committed to setting the framework to replace the current one-size-fits-all licensing arrangements. It has envisioned a functionality-based system, adopting graduated, risk-based requirements.

“The Government’s reforms are designed to ensure consumers can have confidence in who they are dealing with and the obligations that are owed to them,” Mr Frydenberg said.

“Our reforms are therefore aimed at ensuring only legitimate providers participate in the system and that they are regulated appropriately along with traditional providers who offer similar services to consumers.”

It will follow calls from the lending industry, such as that of CBA chief executive Matt Comyn, that BNPL providers should be held to stricter regulatory standards.

The reform plan also has included a focus on cryptocurrency, including work towards a new licensing framework for digital currency exchanges and a custody or depository regime for businesses that hold crypto assets on behalf of consumers, as well as a policy framework for the taxation of digital transactions and assets.

The government will commence a consultation on the feasibility of a retail central bank digital currency in Australia, with advice to be provided by the end of 2022.

Further, the government will work with the Council of Financial Regulators to consider policy options to address the debanking of fintechs – when banks cut off their services abruptly to business customers. Advice on the matter is expected by mid-2022.

Liberal senator Andrew Bragg, who chaired the Senate select committee on Australia as a technology and financial centre, will work with Mr Frydenberg in implementing the changes.

“As more Australians utilise these technologies and invest in these digital assets, it is important that a robust regulatory regime underpins their interactions. Our reforms will do just that,” Mr Frydenberg said.

“They will give consumers greater confidence in their dealings with and utilisation of these crypto assets and new payment methods.”

Shane Conway, NAB executive, transaction banking and enterprise payments weighed in, commenting a “modern, mostly digital payments system needs modern rules and regulations”.

“A balance needs to be struck to ensure customers are receiving the protections they deserve without slowing the innovation we have seen in recent years,” Mr Conway said.

“With these reforms we see potential to offer more consistent protections for customers and boost competition, while supporting the innovation needed to drive economic growth.”

Growing BNPL presence

Many local banks have entered the BNPL market following the success of Afterpay, with Suncorp releasing its offering, PayLater, in late November.

It followed Visa confirming its BNPL solution would be available to Australian and New Zealand customers from 2022, while Mastercard rolled out infrastructure allowing banks and lenders to offer their customers BNPL products across its network.

In August, CBA rolled out its own product, StepPay, offering it to its 4 million customers.

But the bank more recently provided data analysis to a parliamentary committee, noting customers who used BNPL products were more likely to fall behind on debt repayments and to be in financial hardship.

Around 7.2 per cent of customers with BNPL accounts had overdrawn their transaction account, while 4.8 per cent had fallen behind on repayments and 6.4 per cent fell into financial hardship.

In contrast, customers without BNPL were less likely to struggle with debt or to be in financial hardship. Around 3.9 per cent of non-BNPL customers had overdrawn their transaction account, while 2.8 per cent fell behind of repayments and 4.9 per cent were in financial hardship.

BNPL was ranked the fourth most common type of debt held by consumers in the March quarter, with NAB research showing it was held by nearly one in five Australians.

ASIC published findings one year ago showing 22 per cent of customers prioritised paying off their BNPL debt over loan repayments or bills.

The regulator had discovered that 21 per cent of BNPL users had missed a payment in the prior 12 months and 5 per cent had missed mortgage repayments in order to pay off their BNPL debt.

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