Understanding the changes to Buy Now Pay Later

Fact Checked
Updated 26/04/2024
Understanding the changes to Buy Now Pay Later

Time to read : 3 Minutes

The government is planning to introduce legislation that will change how the Buy Now Pay Later (BNPL) scheme operates to better protect consumers.

  • BNPL will soon be classified as a credit product meaning providers will have the same obligations as other credit providers such as banks. 

  • Companies such as Zip, Afterpay and Klarna will be required to make sure BNPL is suitable for customers by assessing their financial position.

Let’s take a look at what this means. 

A quick insight into how BNPL works

BNPL boomed in the pandemic and shows no sign of slowing down, with many online and instore retailers offering the option to customers. 

But BNPL is also a popular option used to pay for bills. According to the latest Bill Stress Index by Compare Club, 37.78% of respondents used BNPL to pay for any kind of bill. This is up from the previous survey in November 2023 with 29.44%. 

The way BNPL works is customers pay an installment for a product, service or bill which is followed by ongoing payments – usually fortnightly – until the cost is paid off.

It’s a payment option that appeals to customers for two main reasons. Firstly they can receive their purchase immediately after making the initial installment, unlike some other finance options that require full payment to receive the goods / service. 

Secondly, it offers flexibility by spreading out payments over a period of time, and – so long as they stick to the arrangement – avoid paying interest which they may get hit with if using a credit card.  

Be aware: where customers can get caught out is if they make a late payment or do not pay the full amount in the required time frame. They are then charged a late fee and possibly interest. 

And if somebody uses a credit card for the BNPL payments, they can also be charged additional fees from their credit card provider for not paying on time. A double whammy. 

What do the BNPL reforms look like?

The application process for BNPL will be longer and not so straight-forward. Providers will be required to ask more about the customer’s credit history, income and expenses, including if the customer has other BNPL products. 

There are plans to introduce caps on the fees charged.  Here’s a breakdown of the fees the government proposes: 

  • Default fees capped at $10 per month.

  • The cap on account fees to be set at $200 for the first year; $125 for the following years, and this would apply across all BNPL loans a customer has with the same provider. 

  • BNPL providers will be prevented from asking customers to close and open new accounts to recharge the higher first year fee of $200.

How other changes in the reform may impact you 

  • Providers would be required to hold an Australian credit license and comply with the National Consumer Credit Protection Act (just like banks). BNPL arrangements would then be classified as low-cost credit contracts.

  • BNPL providers may disclose your repayment history details to credit rating agencies – this information could impact your future borrowing capacity. 

  • For transactions under $2,000, BNPL providers will need to conduct a negative credit check. This shows if you have any defaults, court judgements or have filed for bankruptcy. 

  • Where transactions are $2,000 or higher, it would go beyond the negative credit check to show if you had opened or closed any credit accounts in the past two years.

Bottom line

The proposed changes coming into play later this year are designed to protect Aussies from racking up debt when making purchases via BNPL. They’re also designed to keep BNPL providers in check with caps on the fees they charge. 

BNPL providers will also fall under the credit act and that can have implications on your credit rating. 

Before jumping in to make a purchase, always consider your financial situation and budget – especially with BNPL soon to be classified as a credit contract.

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The information contained on this web page is of general nature only and has been prepared without taking into consideration your objectives, needs and financial situation. You should check with a financial professional before making any decisions.