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- The BNPL sector has been under the radar following concerns about consumer lending practices.
- The Australian Finance Industry Association has released its Code of Conduct, including customer-centric policies.
- ASIC released data suggesting that over half of BNPL customers in financial turmoil held more than one account with BNPL companies.
The BNPL sector has seen unmatched levels of growth over the previous months. Consequently, this has further mandated the need for the sector to undergo regulation. As the BNPL sector comes under scrutiny, the top players might see significant changes in the ways that they operate.
The Australian Finance Industry Association (AFIA) recently released its Code of Practice for the BNPL sector, which came into effect from 2 March 2021 onwards. This came after the BNPL sector faced several criticisms regarding their lending policies. Recent inquiries into their business operations have revealed severe shortcomings for customers.
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Rising concerns about BNPL sector
A bevy of factors raising red flags about the financial position of the customers was observed by corporate watchdog ASIC. The institution reported that-
- 21% of BNPL customers missed their payments.
- 20% of the customers had to cut back on meals and other essentials to stay under their budget.
- Additionally, customers had to hold onto major mortgage and loan payments as they had overspent.
In response to the shortage of money, 15% of the customers had to take out additional loans. So much so, 52% of the customers in financial trouble had to open more than one account- perhaps the biggest red flag amongst all for major BNPL players.
A total of AUD 43 million worth of missed payment fee revenue was observed in the BNPL industry in 2018-19. This was an increase of 38% over the previous year.
Rising popularity or the easy way out?
The BNPL sector witnessed immense growth over the previous year when businesses and households were trying to keep their head above water due to pandemic-induced losses. Consumers sought easier alternatives, including the services of leading BNPL players like Afterpay (ASX:APT), Zip Co (ASX:Z1P), Openpay (ASX:OPY) and Humm (ASX:HUM).
BNPL providers offer a wide range of business models offering customers the choice to pick the one that suits them best. This choice can be made based on the payment preferences of the customers, purchase type and personal circumstances.
People have shown a preference towards BNPL services over traditional lending methods, including credit-cards. These BNPL products do not charge interest for these payments, giving them an edge over other lending methods.
The new Code of Conduct is a genuine attempt to provide fairgrounds for the BNPL sector to function on. The newly launched regulations have a customer-centric approach to the design, marketing, and distribution of a BNPL product or service.
The code is slated to incorporate the vulnerabilities of the customers and provide ethical practices to them. These include a commitment to the Artificial Intelligence Ethics Principles set by the Australian Government. The code also mandates the companies to provide clear and precise instructions about their products and repayment mechanism.
The Central Bank has also raised concerns about the no sur-charge rules, which is where it would focus on. This would provide a fair level of competition and a level playing field for various credit providers.