BNPL cannot be regulated in the same way as credit cards

In an uncertain macroeconomic environment and rising inflation, it’s tempting to find comfort in things that don’t change. With the possible exception of the unwritten rule that credit card interest rates go up, but they never go down.

While many households can afford to pay their credit card bill in full each month, the millions of Australians who “go into debt” on their credit card and pay interest rates of 20% or more are not so lucky. Although official interest rates have fallen to zero in recent years, hardly anyone has experienced a reduction in their credit card interest rate.

But if history is any guide, as interest rates rise, so will the costs of using credit cards. As Australia has one of the most concentrated retail banking sectors in the developed world, customers have often had no choice but to absorb the cost.

It’s no surprise that consumers have lost faith in traditional credit products and continue to turn to safer and more transparent options, like Afterpay. Despite protests from some traditional providers, we continue to see more Australians using Afterpay every month, and our default rates remain near historic lows. The strength of our business model in an uncertain macroeconomic environment reflects our product design: customers repay their purchases in six weeks, which means we are much better equipped to react to rising interest rates.

In the current debate over how products like Afterpay should be regulated, governments around the world have recognized that fit-for-purpose regulation is essential. Afterpay does not operate like a credit card and therefore should not be regulated like a credit card.

Unlike a credit card, Afterpay does not offer customers a high initial spending limit. We start customers with low limits – several hundred dollars at most – and require customers to make their first repayment in advance. Our current model exposes clients to the lowest possible risk.

Customers cannot use our product if they have missed a refund.

We cap our late fees and we don’t allow customers to go into debt.

The cost of credit cards is adding up and millions of Australians have voted with their feet for a fairer, more transparent and affordable way to manage their money.

Research from the Australian Finance Industry Association reveals this shift. The number of active BNPL users in Australia grew to approximately 5.9 million in FY21, earning $264 million in gross profits from interest, fee and surcharge savings.

But that’s only half the story. Over 135,400 Australian businesses now accept BNPL, delivering nearly $2.8 billion in gross profits to merchants large and small, including $2.1 billion in incremental revenue.

These savings and benefits are so important during times when we are all facing financial headwinds.

With high inflation, it is imperative that consumers have access to safe and affordable payment options. According to a 2021 study by respected nonprofit debt relief service Way Forward, the average credit card debt of vulnerable consumers they assist is over $37,000. Although credit cards are already subject to responsible lending obligations, there is clearly more to be done to ensure that credit cards do not expose consumers to this level of harm.

In the meantime, we look forward to working with the government to mandate the current Buy Now, Pay Later Code of Practice — an example of fit-for-purpose regulation that focuses on positive consumer outcomes and has set standards that traditional credit products do not meet.

Getting this next step right is critical – for consumers, businesses and the economy. If we get this reform process wrong, it will not be consumers who will benefit, but rather the multinational credit card companies who are desperate to reconnect people to their credit card debt cycle machine of more than 20%.

Michael Saadat is Vice President of Global Regulatory Affairs at Afterpay.

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