Buy Now Pay Later is an interest free payment service which allows a consumer to delay payment of a good or service or pay by instalments (often fortnightly) over a period of time.
The concept of Buy Now, Pay Later is at the centre of many emerging fintech businesses that offer an innovative way for the payment of goods and services. Although this concept has become more popular, the financial market and ASIC have been quick to raise concerns around the regulation and obligations of these service providers.
How does Buy Now, Pay Later Work?
Buy Now Pay Later works in a similar fashion to layby, the major difference being that you receive your purchase upfront. Here’s how it works:
- Sign Up – Sign up either online or in store with a provider. In most circumstances, users are given on-the-spot approval.
- Purchase – Users make a purchase either in store or online. Some providers only work with partnered merchants while others are accepted anywhere that accepts major credit cards.
- Payment – Users pay back what they spend in four or more equal instalments which are automatically deducted from the user’s nominated card.
Some popular platforms such ZipMoney allow you to spread the cost of a purchase over time and also allow you to select how much you would like to repay and when.
Do I need an ACL to operate my Buy Now, Pay Later Business?
At present, Buy Now, Pay Later service providers are not required to hold an Australian Credit Licence (“ACL”) and as a result do not have the same responsibilities and obligations as ACL holders under the National Consumer and Credit Protection Act (“NCCP Act”).
The defining feature keeping these arrangements outside the scope of the licensing regime is the fact that loans are interest-free. Some providers such as Afterpay and ZipMoney offer an initial interest free period but have ACLs which allow them to charge interest after the initial interest-free period lapses and in the event a user is unable to make a repayment.
How is Buy Now, Pay Later Regulated?
Buy Now, Pay Later services are covered by the Australian Securities and Investments Commission Act 2001 (Cth) (“ASIC Act”) meaning, businesses providing this service can be held accountable for misleading or deceptive conduct by ASIC.
The ASIC Act requires Buy Now, Pay Later service providers to ensure their contracts do not include unfair contract terms. Examples of unfair contract terms include:
- giving the provider broad discretion to vary the contract;
- providing a broad range of circumstances in which the consumer would default on their arrangement;
- limiting and excluding liability for the provision of the goods or services by the merchant;
- holding the consumer liable for unauthorised transactions, even where the provider may know or suspect the transaction is unauthorised; and
- broad indemnification clauses for the protection of the provider.
Does the AML/CTF Regime Apply?
As the space is still fairly new, we are yet to see any concrete evidence suggesting that the AML/CTF Regime applies to Buy Now, Pay Later entities and whether Buy Now, Pay Later businesses are providing designated services to their customers.
The Anti-Money Laundering and Counter-Terrorism Financing Act 2006 (AML/CTF Act) requires reporting entities providing a designated service:
- Be registered with AUSTRAC as a reporting entity;
- Identify and verify all customers;
- Comply with Suspicious Matter reporting Obligations; and
- Have a clear AML/CTF framework in place including an AML/CTF Program covering the reporting entities money laundering and terrorism financing risk assessment.
It is worth noting however, that AUSTRAC has recently issued a notice to Afterpay in relation to potential contraventions of sections 32 and 81 of the AML/CTF Act in relation to customer verification and the requirement to have an AML/CTF Program in place. It remains to be seen whether the AML/CTF Act will be updated to include specific provisions in relation to Buy Now, Pay Later services.
Other Things You Need to Consider
There are various aspects to consider prior to establishing a Buy Now, Pay Later business including:
- Whilst Buy Now, Pay Later is not heavily regulated by ASIC at this point in time, it remains to be seen whether the NCCP Act will be extended to apply to Buy Now, Pay Later providers;
- Buy Now, Pay Later service providers must meet certain requirements to be exempt from the licensing regime under the NCCP Act;
- ASIC is aware of the hardship this service can poses to users and have created a dedicated Buy Now, Pay Later page on their Money Smart website, warning users against the issues which may arise due to overuse; and
- As Buy Now, Pay Later business are not required to hold an ACL, membership with the external dispute resolution scheme, the Australian Financial Complaints Authority (“AFCA”) is also not required, meaning the user does not have access to the same protections in the event of a complaint as a consumer of credit products where the issuer holds an ACL.
Buy Now, Pay Later entities are ever-expanding in Australia – and Sophie Grace is here to help. If you are considering establishing a Buy Now, Pay Later business, contact Sophie Grace for assistance.