Tougher national regulations on buy now, pay later should help protect high-risk borrowers but consumer groups warn the crackdown may not go far enough.
Under the new rules, the popular service will be treated more like other credit products.
Providers will need a credit licence in line with other lending services and adhere to minimum standards and hardship requirements.
They will also have to abide by marketing restrictions.
Financial Services Minister Stephen Jones said borrowers were able to open several accounts at once and rack up large debts far more easily than they would with credit cards.
The services, which include providers such as Afterpay, Zip and Klarna, have created an extra $2.7 billion in revenue for Australian businesses by bringing in customers and allowing shoppers to spend more.
“But with those opportunities have come new and growing dangers to consumers,” the minister said.
Mr Jones said the risks disproportionately affected women, Indigenous people and those on low incomes.
The had been reports of abusive partners weaponising the service by taking out debts without their partner’s knowledge.
At this stage, it’s still unclear how strict the checks on credit will be and whether they will apply to loans of all sizes.
Leniency for small loans is a concern for consumer groups, with CHOICE chief executive officer Alan Kirkland calling for strong requirements regardless of the amount borrowed.
“While the government has said these will be scalable, we should not assume that small loans are automatically safe,” Mr Kirkland said.
“Many of the people who end up in financial hardship as a result of BNPL have smaller loans, often many of them.”
The flagged changes have attracted the support of provider Zip as well as the peak body for Australia’s fintech industry.
FinTech Australia general manager Rehan D’Almeida said buy now, pay later was an Australian innovation story that had been exported around the world.
“Considered regulation sets the bar for the sector and ensures that building trust and enhancing the lives of its consumers remains at its core,” Mr D’Almeida said.
Federal Nationals leader David Littleproud backed the changes in principle.
“We’ll be constructive on this because this is an evolving part of capital markets … sometimes we have to move with to make sure that we protect those that are most vulnerable,” he said.
Federal Greens leader Adam Bandt said the party would look at the proposal but many people relied on the credit product to keep a roof over their heads and food on the table.
“The government’s got to do more than just take away options for people. It’s got to give people the ability to deal with the cost-of-living crisis by freezing rents, or freezing mortgages and by lifting people out of poverty,” he told reporters on Monday.
There are seven million active BNPL accounts in Australia, with the average customer using their accounts for 18 transactions a year.
The average transaction is $136.
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By Dominic Giannini and Poppy Johnston in Canberra