The Federal Government has introduced legislation that will see Buy Now Pay Later (BNPL) services regulated as credit providers under the National Consumer Credit Act.

If passed, BNPL providers, including services like AfterPay, Klarna and Zip Pay, will be subject to the same consumer protections afforded under the Credit Act that apply to other forms of credit, including credit cards and loans.

The bill comes after extensive consultation with industry, with the Government selecting the middle path between three regulatory proposals.

The legislation will see a number of changes to lending laws to account for the operations of BNPLs (which previously faced minimum regulation), including: an amendment to the Credit Act, requiring BNPL providers to hold an Australian credit licence; a requirement to comply with existing credit laws that are regulated by ASIC; and, the establishment of a new category of ‘low‑cost credit’ under the Credit Act, that seeks to reflect the lower risk and cost of BNPL compared with other regulated forms of credit.

BNPL providers, crucially, will also be required to assess the suitability and affordability of these products for their consumers.

Assistant Treasurer and Minister for Financial Services Stephen Jones said that the proposed legislation would balance the need for increased consumer protections for BNPL users (many of whom are becoming trapped in debt spirals) whilst also ensuring that innovation and competition introduced by the sector is not stifled.

“The Government recognises the competition BNPL has introduced into credit markets, allowing consumers access to small amounts of credit and the sector’s contribution to the broader economy,” Jones said in a statement.

Citing figures from the Australian Finance Industry Association, the BNPL sector is estimated to support more than 120,000 local jobs and add up to $18.4 billion to Australia’s GDP, Jones said.

AFIA itself also welcomed the introduction of the bill as a “solid regulatory foundation for the BNPL sector.”

“This legislative framework will not only enhance consumer trust and enshrine consumer protections into law, but underpin the BNPL sector for the future,” AFIA chief executive Diane Tate said in a statement.

Jones added: “The new laws get the balance right between consumer protection, innovation and competition.

“We want Australians to enjoy the benefits of BNPL, while knowing there are strong consumer protections in place. If it looks and acts like credit, then it should be regulated as such.

Jones said that this regulation will set the bar “just high enough to ensure that irresponsible lending isn’t occurring, but not too high that means credit isn’t available to people who need it”.

Around two out of every five, or 40 per cent of, Australians used a BNPL service in the six months to March 2024, data from consumer finance website Finder shows.

The data also shows that the number of Australians paying BNPL late fees has increased significantly in the last four years – from around 5 per cent in January 2020 to 20 per cent in January 2024.

Millennials and Gen Zs (those between the ages of 12 and 27) were most likely to avail themselves of BNPL services, with 52 per cent and 59 per cent of these age cohorts using BNPLs, respectively.

The Government acknowledged that an increasing number of BNPL consumers were struggling to stay on top of their debt.

A number of consumers are also using BNPLs to pay for essential goods and services, rather than big-ticket luxuries – as they are typically marketed for.

Jones cited a 2022 survey by the Good Shepherd which found 84 per cent of financial practitioners had reported that their clients had tried to manage the debt by opening additional BNPL accounts, leading to an unmanageable debt spiral.

“People who have got multiple accounts, they’re racking up thousands and thousands of dollars in debt, they’re the sort of things we’re trying to ensure protections against and the new laws will do just that,” the Minister said.