Buy Now Pay Later in Australia has moved into a new era, with the sector’s products now regulated by credit laws.
It means customers signing up for products like Afterpay will now have to answer questions about their finances and have their credit history checked before they can pay in four instalments.
Michael Saadat, International Head of Public Policy at Block, the owner of Afterpay, talks to Sean Aylmer about how the changes work, and why they welcome the tailored regulation of the industry.
Welcome to the Fear and Greed business Interview. I'm Suan Alma. Buy Now, Pay Later in Australia has moved into a new era, with the sector's products now regulated by credit laws. It means customers signing up for products like after pay and Zip will now have to answer questions about their finances and have their credit history checked before they can use by Now, Pay Later. I wanted to find out more about how these changes are affecting their companies involved, but also the customers and merchants who use the products. Michael Sadat is the international head of Public Policy at Block, the owner of After Paying. Michael, Welcome to Fear and Greed.
Thank you Sean for having me so.
Regulation has been on the cards for many years for the sector. What exactly has changed this week?
So as of Tuesday this week, the buy now, Pay Later industry is now subject to a form of regulation under the National Consumer Credit Protection Act. And I say a form of regulation because the government decided that in bringing by Now, Pay Later within this piece of legislation that regulates all consumer credit in Australia, that a tailored form of regulation was appropriate.
So there's a new category.
Of credit contract called low cost credit contract or l triple C another acronym for everybody to learn, and ultriple cs are regulated slightly differently to credit cards. And that's because in deciding what policy settings should be put in place, the government acknowledged that by our pay, latter products like after pay tend to be lower risk, lower cost, the fact that they never charge interest, the consumer harms are just different to what we see with credit cards, and therefore a tailored form of regulation was appropriate.
Okay, so where they landed is it about right? Do you think?
Yeah? We do think it's about right.
I think, you know, there's always questions of detail that you might quibble with, but yes, fundamentally we think they got the balance right. The process started a few years ago when they looked at sort of the different options and they ranged from a very light touch approach to an approach that would see after pay and other products regulated exactly the same as a credit card. And we were we were making the case that that was not appropriate, and fortunately the government accepted that and we ended up in a sort of middle ground option for consumers.
So let's take the ones who are about to get an after pay product as of today, So they've never had enough to pay product. What a difference is it to a week ago? What do I need to do if I want to use after pay?
Yeah, So the change for new customers applying today is that you will be asked to answer a couple of questions about your financial situation. You'll be asked to tell us your income and your expenses, and whether you've got certain types of credit products. And you'll also be asked to agree for us to perform a credit check on you. So they're the main differences that apply today for those new customers. And assuming the answers to those questions are satisfactory and the credit check is satisfactory, you'll be assigned a spending limit, an initial spending limit by after Pay, which will enable you to then use the product.
What about people who have been with after pay for a while when they use their after pay product this week? Does it make any difference?
So for existing customers there's not really a change, at least initially. So anyone with an account prior to regulation commencing will have had a spending limit assigned to them, and those spending limits can range up to up to four thousand dollars actually, and so you can keep that spending limit and keep using it without having to go through the process I just described. That applies to new customers. If, however, you would like a higher spending limit, then the new regulatory framework does apply, and you will be asked to answer a couple of questions and you'll be asked to also to agree to a credit check.
Okay, So that's for new users, existing users, What about have to pay? Does it make your job much more difficult?
We don't know.
We don't see that it makes our job significantly more difficult.
There was obviously some work involved.
In preparing for the regulatory changes that have become effective this week, building the credit check process and changing the customer onboarding flow for new customers and existing customers who are applying for a higher spending limit. You know, there are some changes, you know, at the back end as well that are required. But generally speaking, the fact that we've we've now got a tailored form of regulation is the most important thing, and it's a form of regulation that we've been operating under in New Zealand since September last year. The New Zealand government did a very similar thing and came out with a specific form of regulation for by now pay later, and that's been working well. And although Australia not exactly the same as New Zealand there are some nuances, it's broadly the same and we believe it it will be great for the industry moving forward.
Stay with me. Michael will be back in a minute. My guess this morning is Michael Sadat, International Head of Public Policy at BLOCK. Before the break, Michael, we talked about the users existing and new. We talked about art to pay. Of course, the group we haven't spoken about is merchants. So do these changes make much difference to merchants?
So the changes themselves don't apply to merchants. Things continue much the same as they have been so far, I think for merchants though, and you know, the community more generally, the fact that BALPA that is regulated does provide a degree of confidence in the product and in the market. You know, regulation does play an important role in financial services, and in this case, we think having the sort of debate around regulating the industry resolved and a decision made that's actually been implemented is a really important masterone for the industry as a whole. And I think for merchants who might have hesitated or thought twice about whether to allow payment methods like after pay to be used, I think this now does resolve that long standing issue. So from that perspective, I think merchants can have a lot of confidence moving forward. But otherwise there's no direct impact on merchants. All of the regulatory obligations sit with after pay.
Well, one thing, I remember talking to an advisor to one of the big buy now, pay later groups and he said, there's a whole generation of people now, from millennials to younger who are used to this form of payment, and I thought was really interesting because my age group was new. But he said, by now pay later has a long lifespan simply because it's just how people make payments nowadays. Do you think what we're seeing in terms of the regulation will make any difference today.
No, And in fact I think it will support and bolster the industry because consumers can also have confidence in the fact that the product they're using is regulated. It's an interesting point you make, actually, because I think it used to be very much a right of package for people entering adulthood or entering the workforce, for the first time that you would get a credit card, like you, you would sign up for a credit card. That was the thing that everybody did. Exciting, Michael, very exciting back in the day.
It was. But that is no longer the case. It is no longer a rite of passage.
Credit Card usage is significantly down compared to where it was several years ago. Younger consumers mostly don't have credit cards. It's not seen as a desirable thing or a necessary thing anymore. And you know this is now playing out more broadly. The average consumer using after pay is now aged about thirty eight or thirty nine, so not especially young. These are people with kids with mortgages. And recent research that we published this week shows that people with after pay have very similars credit scores to people who are using credit cards. So it's a very mainstream user in demographic.
Now, what do people spend it on? If that's your demographic, what do they spend it on? What do they use it for? Sorry? What are they used for?
I think they're using it for virtually anything these days. It used to be that after pay was very popular with fashion and beauty and footwear and homewares, and it still is, like that's still very much the main way that people use after pay for those kinds of purchases, but increasingly people are using it for their everyday spend. You know, they see it as a payment method that's convenient, it helps them budget, and we've now enabled consumers to pick a preferred payment day, so instead of your payment's coming out, you know, fourteen days after you make that initial purchase, So if you buy something on a Monday, it used to be that it would come out two weeks on the Monday. You now can select your preferred payment day. So if you buy something on a Monday, but you prefer to actually pay us on a Thursday because that's when you get paid, then the payments will come out every fortnight on a Thursday, and it just makes it a lot more convenient for people who are budgeting, you know, they're spending.
Perhaps you know, one way of judging whether or not it's working is your arrears or people who aren't paying back. Essentially, has that changed much over the years.
No, In fact, it continues to improve and it remains under one percent our credit losses globally, so we see a really healthy repayment rate with consumers over ninety five percent of our customers don't pay late fees. It's a product that I think because it's so simple and easy to use, and also because consumers really enjoy using it. One of the guardrails that we have is that if you're late on a payment, you can't actually use this again until you're up to date again. So that's an important protection for consumers. It means that the people who are using US and spending have already you know, they're up to date with their payments, so they're not getting sort of further into debt when when they potentially shouldn't be.
We're kind of out of time. MIC. But one final one, where's Australia sit when it comes to regulation of these sorts of products? In particular, I'm interested in the US because after pay now being owned by a block and rolling out in the US, where does Australia sit that.
So Australia's the second country globally to roll out fine ou pay that regulation after New Zealand, and it looks like the UK will be the third major market to roll out bind our pay that regulation, and it's doing so in a very similar fashion. So the UK government over there has also decided to go with a sort of tailored and bespoke approach regulating a pay that, which is really encouraging. The US is different because the regulation of credit in the US does happen at both the federal and state level, and so you have essentially up to fifty different states regulating in slightly different ways. So After Paid does have licenses in those states in the US where that's required, and there has been some federal oversight in the US, but there have been some recent changes over there with the change of administration, and so we're sort of working through that at the moment. But yes, it is a it's a much more complex picture over in the US.
Michael, thank you for talking to Fear and Greed.
Thanks so much for having me.
That was Michael Sedat, International Head of public Policy at Block including after Pay. This is the Fear and Greed Business Interview. Join us every morning for the full episode of Fear and Greed Business News. You can use some I'm Sean elmont Enjoy your day.