Australia’s buy now pay later companies are pledging to do better by their customers. Here’s what they’re promising.
- A “world-first” code setting out minimum standards buy now pay later companies must follow has been unveiled by the Australian Finance Industry Association (AFIA).
- It promises to make late fees fair and capped, limit services to those above the age of 18, freeze and even waive fees in case of financial hardship among other measures.
- The voluntary code is expected to be signed on by companies covering 95% of Australia’s BNPL sector, although won’t be legally enforceable.
Buy now pay later (BNPL) companies like Afterpay and Zip look set to sign a voluntary code of conduct that would help protect customers after a draft was released by the Australian Finance Industry Association (AFIA) on Wednesday.
“This draft Code goes above and beyond existing laws by increasing safeguards for customers, including upfront assessment of customers to ensure the product will be suitable for them [and] product limitations to ensure customers don’t over-commit,” AFIA CEO Diana Tate said in a statement outlining the code.
The code was drafted by the largest players in the sector including Afterpay, Zip, Brighte, flexigroup, Openpay and Payright. Collectively they make up 95% of the Australian market. The code comes after facing increasing scrutiny from the likes of financial regulator ASIC and the Reserve Bank of Australia (RBA).
Hailing the code as a “world-first for the BNPL sector”, AFIA says the code is a step in the right direction. However, it should be noted that an industry code isn’t a substitute for actual regulation. Industry codes aren’t legally enforceable, and buy now pay later companies won’t be required to sign up to operate. The matter of whether or not they follow their own rules will fall to an independent committee, which won’t have the powers granted to a regulator like ASIC.
Zip co-founder Peter Gray, who has been advocating for greater regulation of the sector, told Business Insider Australia is a “strong starting point”, but indicated Zip was already going beyond these standards.
“Zip welcomes this Code because it spells out minimum standards of how firms in the BNPL sector should conduct their business,” he said. “Zip will keep implementing its own more robust and consumer-focused standards – which include identity and credit checks – which [we] know delivers our customers better outcomes.”
Afterpay was also quick to point out that some of the code’s proposals, like a late fee cap, have already been adopted.
“We believe a code can play an important role in enshrining some of the consumer safeguards that have made our product loved by over 3 million customers in Australia and New Zealand,” CEO Anthony Eisen told Business Insider Australia. “We know the importance of listening to our stakeholders, and look forward to hearing from them during the code consultation process.”
They’ll now have six weeks to have their say on what the code should expect of signatories, with AFIA expecting to have it finalised by July. Here’s what the draft includes.
Late fees will be “fair, reasonable and capped”
When a customer fails to pay an instalment on time, they are charged late fees. It’s one of the few ways that BNPL providers make money from the customer, given they generally don’t charge interest on the purchase price.
The draft industry code looks to place the restrictions on their ability to do, although its plan to do so is a little light on detail.
Signatories will promise to ensure their late fees are “fair, reasonable and capped”. While the code doesn’t lay out hard and fast fee limits, as a guide Afterpay’s are already capped at 25% of the order or $68, whichever is less. Since Afterpay helped drafted the code, it’s assumed any cap equal to or below this limit is acceptable.
The code also makes a few other promises. Companies will be expected to contact customers before charging them, reverse them in the case they don’t, and provide at least 40 days notice if those fees change.
Customers must be over 18 years of age and will have their suitability scrutinised
Explosive customer growth has characterised the relatively young sector, with the likes of Afterpay and Zip attracting millions of customers in just a few short years.
“Approximately 30% of Australian adults (5.8 million) now use BNPL services, so this is a good time for the industry to develop an industry code to set the standards and drive good practices,” Tate said.
While there’s a good argument to be made that a debt product should be regulated before it becomes a habit of one in three Australians, perhaps it is better late than never to introduce “appropriate safeguards”.
Signatories will promise to only extend their services to customers 18 years and older, assess customers for financial vulnerability during identification, and only approve customers assessed as able to make repayments.
Customers that set off warning bells may be approved for lower limits, be required to make an upfront payment, provide more information, or be denied outright.
Companies will stop trying to sell to customers who can’t afford it
Customers who falter on their repayments will be given some reprieve to get their affairs in order, under the code.
Companies have promised to halt the flow of marketing material to customers behind on their payments. Those in arrears will not be approved for any additional purchases and may renegotiate their payment plan or have late fees and repayments frozen for a period. Those experiencing hardship may be offered some additional assistance and may have fees and charges waived.
In this way, the code at least sets out some respectable minimum standards, even if it leaves plenty undone.