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BNPL stocks dip as ASIC flags regulatory changes coming in 2021

ASIC today released its latest findings into the BNPL sector, including highlighting the regulatory changes set to be introduced in 2021.

Despite the spectre of competition and regulation looming large over the Buy Now Pay Later sector, the mainstay stocks within this space – Afterpay, Zip, Sezzle, Openpay, et al – have handsomely outperformed the market since January.

In fact, even with the Australian Securities and Investments Commission today announcing a new set of regulatory obligations for BNPL companies, these stocks initially rallied, before dipping within the first 30 minutes of trade. Following that, any further trade was halted, after the Australian Stock Exchange (ASX) suspended all trading activity due to data issues.

The ASX said it would not reopen on Monday, November 16.

ASIC’s BNPL vision

The corporate regulator on Monday released its latest research into the BNPL sector. This research, while illuminating, was already mostly well-known to the market. Namely, that transaction volumes and credit provided by the BNPL sector had surged within recent times, while credit cards have grown increasingly obsolete, with credit card transaction volumes trending flat.

Beyond that, the regulator noted that while BNPL as a service ‘works’ for many users, for others it may be causing harm – with 21% of users missing repayments, according to a survey conducted by ASIC.

‘In the 2018–19 financial year, missed payment fee revenue for all buy now pay later providers in the review totalled over $43 million, a growth of 38% compared to the previous financial year.’

Elsewhere, the regulator also described how ‘some’ users, burdened by the pressure from BNPL repayments as a result of financial hardship, may be foregoing the purchase of basic necessities, such as meals.

‘There is also a risk that consumers may be paying inflated prices for some goods and services when using a buy now pay later arrangement,’ ASIC flagged.

In response to these findings, ASIC made two key points as part of this latest report:

One, a new set of design and distribution obligations for BNPL companies are set to come into effect in October 2021. ‘These obligations will require the industry to design fit-for-purpose products that meet consumer needs. They will also need to take steps to ensure their products are reaching the right consumers,’ ASIC said.

Two, ASIC noted that a code of conduct for the BNPL space, is currently being developed by industry participants. This code will be an important component in mitigating consumer harm, the regulator said.

Zip, Afterpay share price dips on ASIC news

BNPL juggernaut Afterpay (APT) got on the front-foot in response to ASIC’s latest report, responding to the regulator’s review of the industry before the market opened on Monday, October 16.

The $28.87 billion company said it welcomed the report by ASIC, lauding the regulator's approach, which focused on improving consumer outcomes opposed to creating 'prescriptive compliance obligations.'

Afterpay took today's news as yet another chance to hammer home its consumer-focused approach to business, noting that while the company may account for a market-leading 73% of Australia’s BNPL transactions – according to ASIC’s report – it accounts for a mere 27% of outstanding BNPL debt.

That disparity, the company stressed, can be attributed to its ‘differentiated business model that is unlike traditional credit or other BNPL providers with built-in consumer protections that ensure average transaction values remain the lowest [,] payment terms are strictly short-dated [,] and customers cannot revolve in large or accumulating amounts of debt.'

Elsewhere, Afterpay also addressed one of ASIC’s specific points concerning the deferment of necessities as a result of outstanding BNPL balances, countering that:

'Afterpay's own research of 144,000 Afterpay customers found there is no causal link between spending on Afterpay and changes in spending on essentials.'

Key Afterpay rival Zip also released a statement to the market in response to ASIC's report, noting that they also welcomed the changes, with the company's Co-founder and Chief Operating Officer, Peter Gray, saying:

'This is an important report from ASIC that shows the continued growth and popularity of the buy now pay later sector in Australia. It confirms the adoption of better ways to pay by millions of mainstream Australians as they shift away from the broken credit card model.'

Other key players in the BNPL space, including Openpay, Sezzle and LayBuy have yet to provide commentary on ASIC’s latest report.

How the market responded

Though the ASX suspended trade of all securities due to data issues – impacting both morning and afternoon trade, in the first 30-minutes of trade, Afterpay, Zip and Sezzle all opened higher before dipping lower.

Indeed, as the AFR conceded, though ASIC's latest report highlighted a number of problematic aspects of the sector, it ‘stopped short of recommending new consumer protections.'

This point likely underscores why there was not more pronounced selling pressure at the open, though investors will likely be eagerly watching the space when trade resumes. Regulation, just like competition, was always coming, it was simply a matter of to which degree.

YTD Afterpay is up 232%, Sezzle is up 297% and Zip is up 69%.

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