BNPL: What New Rules Mean For Investors

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A new regulatory landscape is separating the wheat from the chaff inside the Australian BNPL sector and not every competitor will come out a winner.

-BNPL services now regulated as credit in Australia
-The era of explosive growth now in the past
-Margins under pressure, but Zip Co found growth in the US
-Sector probably cum shake-out and consolidation

By Jason Collins

In Australia, Buy Now, Pay Later (BNPL), once touted as ‘interest-free’ shopping, is facing considerable regulatory reckoning, and it has been a long time coming.

In 2023, the Australian Federal Government announced BNPL products would be regulated as credit products, with Australian Minister Jones stating,

“If it looks like a duck, walks like a duck, sounds like a duck, it is a duck – and it should be regulated as a credit product”.

In March 2024, an exposure draft bill was released for public consultation. This bill regulated BNPL as “low-cost credit contracts” under the National Consumer Credit Protection Act (NCCP). Shortly afterwards, in June, the bill was introduced to local Parliament, and in December, the law was passed, embedding BNPL within Australian credit regulation frameworks.

However, it wasn’t until June 10th, 2025, that the new rules took effect, impacting Australian BNPL providers in full force. The NCCP has effectively closed the often-exploited loophole that allowed Australian providers to operate outside of traditional lending laws.

Many believe this marks the end of the BNPL sector’s era of frictionless “free” credit, leading to considerable implications for companies like Afterpay, now part of Block ((XYZ)), and Zip Co ((ZIP)), as well as their investors.

For Zip Co, the implications are especially interesting, considering this company has staged a remarkable ASX turnaround, with shares soaring in excess of 250% since April lows.

This share price comeback has been inspired by rapid expansion in the US business and disciplined capital management. With positive gains on the horizon for Zip Co, investor confidence in the BNPL market has been reignited — at least for some.

Today’s article will examine the new rules and their implications for investors, as well as how Afterpay and Zip Co are responding to the tighter regulations. The table at the bottom lines up key ASX-listed BNPL services providers.

New Rules Rein in BNPL Lending

BNPL services providers experienced explosive growth between 2016 and 2021, offering on-the-spot, interest-free loans with minimal checks. Unsurprisingly, this lending model was popular among younger shoppers and those with thin credit files.

To put this into perspective, Australia has around 7 million active BNPL accounts, which is considerable for a population of approximately 26 million; however, it is questionable how many of these accounts are actually active.

There’s no debate, today growth is much reduced. The new rule changes and increased scrutiny have led to a significant slowdown in activity.

One of the biggest changes is any Australian company offering BNPL must carry an Australian Credit License alongside membership of the Australian Financial Complaints Authority (AFCA) dispute resolution scheme. They must also be supervised by ASIC while complying with reporting, dispute resolution, and compliance obligations.

Another rule is that providers are now required to verify their customers’ financial situations and assess creditworthiness before extending credit. To better evaluate creditworthiness, mandatory credit bureau checks are necessary to ensure borrowers can repay their BNPL installment plans. Then there are fee and charge restriction rules.

Caps on fees of $200 in year one and $125 in later years, plus limits on default fees, now prevent BPNL from being more expensive than comparable low-cost credit. Additionally, penalty fees must now be proportionate and reasonable.

When it comes to responsible lending and hardship obligations, lenders are now required to comply with responsible lending provisions in the NCCP. Moreover, borrowers who are experiencing financial hardship must have access to flexible repayment arrangements.

The new rules also grant ASIC enforcement powers, including the ability to suspend or penalise non-compliant BNPL providers.

Afterpay and Zip Co Adapt to Tighter Regulation

With these new rules in place and tighter regulations, leaders in the space, such as Zip Co and Afterpay/Block, alongside other companies, are finding they must adapt.

According to multiple sources, both Afterpay and Zip Co are supportive of the reforms and eager to remain compliant. Afterpay’s parent Block noted it “welcomes the certainty” of clear rules for BNPL, and Zip Co has been a “longstanding advocate for fit-for-purpose regulation” in this sector. Here’s how they are adapting:

Afterpay

Afterpay, the pioneer of BNPL in Australia, built its user base on seamless instant credit approval, which is now no longer permitted.

To adapt, the company has now begun conducting credit checks for all new customers and, when raising spending limits, marking a pivot to a responsible lending model. Fortunately, for Afterpay, it has the scale and resources to integrate new compliance measures.

In addition, the head of policy for Afterpay said he “welcome[d] consistency and transparency across the sector,” arguing the proper consumer protections benefit everyone, demonstrating the company’s willingness to change.

Afterpay is also further positioning itself as a responsible lender by framing the rule and oversight changes as an opportunity to better balance compliance and customer experience, even though these extra steps may deter some shoppers at the margin.

Zip Co

Rival Zip Co has claimed that it has already been operating under stricter lending practices. Zip’s co-founder, Peter Gary, stated the new standards “are aligned with Zip’s existing practices.” Unlike Afterpay, Zip Co had already held a credit license.

It had also already conducted credit and affordability checks on all its customers even before the new rules took effect, with its flagship products Zip Pay and Zip Money. This underscores Zip Co’s strategy of focusing on credit quality over raw user growth, a move that investors have been urging as the company pursues profitability.

Based on this, the company is finding it easier to transition to the new framework for credit lending, as it was closer to a traditional credit provider from the outset. In fact, it might even level the playing field for the company by eliminating the advantage other companies had by onboarding clients without any vetting.

Additionally, the company’s sharp ASX share-price rally, supported by US demand that lifted total transaction volume by more than 40%, has prompted upgraded earnings guidance and underscored its renewed discipline.

This is paying off, as the company was previously in talks about a potential buyout. However, Zip Co has now taken this option off the table in light of its stronger credit discipline, which has led to its recent successes alongside management’s confidence in the resilience of the evolving US market.

Investor Considerations: Profitability, Margins, and Market Outlook

With BNPLs facing stricter oversight and legalities, it’s natural for investors to be concerned about putting their money into these companies.

Profitability Challenges

The BNPL business model, as a sector, has yet to prove it can be consistently profitable. This is likely because for years, many providers prioritised user growth over earnings, resulting in exponential losses.

For example, amid losses, Zip Co’s share price fell approximately -95% from its peak between 2021 and 2023, forcing the company to quickly exit 10 of its 14 international markets to conserve funds.

Fortunately, since then Zip Co’s sharp recovery and reestablished confidence, thanks to its transaction volumes, earnings increases, and US market strengths, has seen it become one of the ASX’s top performers.

Afterpay hasn’t been as lucky lately. Amid mounting losses reported recently, more than 10% of its users were advised to close their BNPL accounts, usually when trying to qualify for a mortgage.

Many of these individuals were offered credit cards instead, which underscores the growing financial pressure and shifting financial attitudes from traditional lenders. Ultimately, for Afterpay, which still commands one of the largest BNPL user bases in the world, and for its competitor Zip Co, the challenge now is navigating the regulated path to sustained profitability.

With these two case studies in mind, it’s evident the tighter lending rules are slowing customer acquisition and transaction volumes since more applicants are being denied credit. For Zip, improved loan quality and disciplined US growth could help sustain its recovery and justify investor optimism.

For Afterpay, recent user attrition highlights how regulatory pressure and lender attitudes may weigh more heavily, leaving the jury still out on whether stronger credit checks will offset cooler growth.

Investors in Australia and globally will be watching closely to see how the sector at large navigates the regulated path to profitability.

Expected Margin Compression

It’s expected the newly minted rules will place significant pressure on BNPL profit margins from multiple angles. For example, compliance costs associated with licensing, customer credit assessments, and regulatory reporting will contribute to higher operating overheads.

In addition, the Australian Reserve Bank is reviewing whether BNPL companies can pass on merchant fees, which is also cause for concern as its decision could further squeeze profit margins.

Although the merchant fees, which range from 3% to 4% of each purchase value, generate most BNPL revenue, these fees could discourage BNPL use or lead consumers to demand lower discount rates.

Market Consolidation

With the regulatory compliance challenges, shake-outs will likely be accelerated in the crowded BPNL sector.

Smaller unprofitable players will find it quite challenging, if not impossible, to meet the new licensing requirements and responsible lending standards. A prime example is Openpay.

Openpay was an ASX-listed BNPL that collapsed into receivership in early 2023 when the company was unable to raise capital to cover mounting losses.

Additionally, observers have also noted rising competition and operating costs –-which we touched on earlier-– are forcing smaller BNPL companies out of the market or to merge with bigger businesses.

For instance, fringe players like Humm Group ((HUM)) have scaled back their ambitions, and in the past 18 months, Zip Co has drastically reduced its workforce to cut costs, but it’s not bleak news all around.

The upside for investors is the BNPL market is likely to consolidate around a few dominant providers who are perfectly positioned to capture whatever growth remains in the space.

For example, for Zip, this positioning is strengthened by its thriving US operation and improved balance sheet, which have already translated into stronger share market momentum.

Overall, it’s believed a more concentrated market will potentially improve profitability in the long run; however, until then, volatility is expected to remain.

Business Model Sustainability

Considering all that is now known about the new rules for BNPLs and their implications for investors in terms of profitability, margin compression, and sustainable marketability, it’s only natural to wonder if the business model is sustainable.

There are arguments for both sides, with bulls arguing the regulation ultimately legitimizes BNPL companies. Legitimisation will likely prompt banks and larger financial players to acquire or partner with the best BNPL platforms. Should this happen, it could mean BNPLs could expand services into longer-term financing, subscription models, or even integration with banking apps.

There is also a view that millennial and Gen Z consumers genuinely prefer BNPL for its budgeting convenience, suggesting enduring demand if providers can offer it responsibly.

On the other hand, critics have pointed out much of the profit acquired by BNPLs came from lending to subprime borrowers who were unable to access different forms of credit. With restrictions tightening, BNPL volumes in the segment are declining, a trend already evident.

Additionally, big banks and tech firms like Apple and PayPal are entering installment payments, which is eroding the novelty of stand-alone BNPL services.

BNPLs are likely to need to broaden their revenue streams beyond simple fees and late charges, and may even have to charge interest on longer-term plans or monthly account fees to remain sustainable.

Such moves could deter consumers and ultimately lead to unsustainability.

Bottom Line

The BNPL transition to a regulated financial service looks to be a ‘double-edged sword’ for investors. Experts agree greater consumer protections and oversight will likely reduce the risk of spectacular credit losses, potentially making the sector more sustainable in the long run.

In the near term, previously unchecked growth is disappearing rapidly, with key players scrambling to secure a marketplace while fringe companies suffer. Additionally, profit margins are very clearly under pressure, and only the most resilient and adaptive players are likely to survive the coming shake-out.

Key ASX-listed providers of BNPL services

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