It started out with a handful of players, and grew rapidly into a crowded space before tighter regulatory controls and excessive competition took their toll on Australia’s buy now pay later (BNPL) sector, with most of the ASX-listed stocks being forced to close back in 2022.
In an effort to offer even more protection to consumers, the Australian Securities & Investments Commission (ASIC) is proposing to modify the responsible lending obligations of BNPL services to regulate them under the Credit Act.
What ASIC is trying to balance is the “competitive benefits of low cost credit contracts for consumers and the economy” with the financial well-being of the shopper.
With middle-income earners feeling squeezed by the spiralling cost of living, ASIC is using these regulations to discourage consumers from relying on BNPL schemes - or credit cards and personal loans - to cover everyday expenses.
What’s in store for BNPL
While legislation was introduced in June 2024 by the Albanese government to regulate BNPL operators as consumer credit, updated legislation now requires BNPL providers to hold an Australian credit license and comply with new and existing credit laws regulated by ASIC.
Subject to a consultation process for affected parties, new laws starting in June herald specific new obligations that apply when a BNPL contract satisfies the definition of a low-cost credit contract.
“The new laws are designed to maintain the benefits of buy now pay later contracts while boosting protection for Australian consumers,” ASIC noted.
“We want Australians to enjoy the benefits of BNPL, while knowing there are strong consumer protections in place,” Assistant Treasurer Stephen Jones said.
“Our changes are balanced and proportional and maintain the consumer benefits afforded by BNPL products,” he added.
While changes to BNPL regulations have been welcomed by consumer groups, such as CHOICE, the BNPL sector is yet to respond to the latest regulatory changes.
Key BNPL survivors
Two of the bigger players in the ASX-listed BNPL sector are U.S. based Square nowadays Block (ASX: SQ2), which acquired the former darling of the listed BNPL sector, Afterpay for a mouthwatering price in late 2021.
Despite earnings growth, Bell Potter recently noted that Block is trading at a massive 87% discount to its historic earnings multiples.
Block has a market cap of $6.8bn which makes it a top ASX100 stock; over the past year the stock has outperformed the ASX200 Index by 28%.
The stock is currently trading at $137.40.
One of the other bigger players in the sector is Zip Co (ASX: ZIP), which despite its fortunes soured in 2023 – trading at under $.030 cents per share – appears to have been staging a comeback since June last year.
Based on RBC Capital Markets’ recent client note, Zip Co is one BNPL survivor worth keeping on your radar. Watch out for the stocks' next market update on 25 February.
Last year Zip Co was one of only ten stocks on the Small Ordinaries in 2024 responsible for driving the index to a respectable 8.5% gain.
Zip Co has a market cap of $2.8bn making it a top ASX200 stock; the stock is up 142% in the last 12 months and year to date is down 25%.
ZIP shares are in a downtrend confirmed over multiple periods. In the near-term, the 5-day moving average lies beneath the 20-day moving average.
Consensus is Moderate Buy.
Other noteworthy BNPL survivors
Key metrics
BNPLs tend to have sizable refund facilities which they draw on to operate, and how they use these facilities goes a long way to explaining their future financial performance.
In most cases BNPLs will pay the merchant first, and then have the customers repay them over time.
Generally speaking, the higher the repayment (amount) and frequency, the better the receivables turnover should be.
Think of the receivables turnover ratio as a measure of how efficiently a firm uses its assets.
Another key metric to track when comparing BNPLs is net transaction margin (NTM), which reflects a company’s gross profit (as a percentage of gross merchant volume) after factoring in losses and funding costs. The higher the NTM the better.
The beauty of the NTM is that it reveals to investors the business model’s operating profitability and the direction (trend line) in which it’s heading.
Then there’s the cost-income ratio which is the ratio of total operating costs (excluding bad and doubtful debt charges) to total income (the sum of net interest and non-interest income).
This article does not constitute financial product advice. You should consider independent advice before making financial decisions.
