As a requirement from 1 September, the Australian Prudential Regulation Authority (APRA) in a letter to banks specifically outlined that buy now pay later (BNPL) debt must be factored into mortgage debt ratios.
This is a first for BNPL as previously it was largely up to the discretion of the bank as to how they treated the debt.
Other unsecured debts such as a credit card limit are already factored in - for example, if a customer has a $20,000 credit limit, even if not maxed-out the lender will likely assess the customer as having a $20,000 credit card debt.
"In the current environment, with high household indebtedness and rising interest rates, it is important that ADIs [banks] are prudently managing risks in residential mortgage lending," APRA's note to banks said.
In a tough year for the sector - Zip Co for example posted a full-year loss of $659 million - payments expert Grant Halverson said this could impact further.
"Mortgage brokers, which now supply up to 70% of new loans, should be advising clients of this," Mr Halverson told Savings Media Group.
Mr Halverson, formerly an executive at Citi and Diners Club, also said rising interest rates will hit the sector.
"BNPL must fund the gap between paying merchants and being paid by consumers," he said.
"It's fixed income as merchant fees dominate revenue, making it hard to offset cost increases with new revenue without charging consumers - which would destroy the offer."
Mr Halverson said large players in the market should be able to weather the "perfect storm" of rising interest rates and other challenges.
"Regulation is but one issue and will not impact existing banks or other registered lenders - for example Latitude, PayPal and so on," he said.
However he said unregulated fintechs could struggle.
"They have five key issues that need to be fixed now - profitability, scalability, regulation, rising interest rates, and credit losses."
- Grant Halverson, former Citi and Diners Club executive.
"Comparing bad debts to receivables [assets] as all other lenders do shows the risk; Afterpay has 13.9% of bad debts to receivables; Zip, 9.7%, Klarna, 8.1%, and Affirm, 6.5%."
This is compared to the United States' credit card average of 2.62% in 2021 - now estimated to be 3.06%.
Regulation - good or bad for sector?
Recently, regulators in the United States said they will pursue regulation of the sector, treating it the same as credit cards.
The Australian Government also said it will aim to put BNPL under the National Consumer Credit Protection Act of 2009.
This means credit checks, responsible lending guidelines, and customer hardship programs.
A recent joint study between the University of Sydney and illion found many consumers look favourably upon BNPL after they have defaulted on other debts because the installment programs do not conduct credit checks.
"Australia and the UK have already signalled full credit and lending regulation with another seven markets saying they will follow the biggest - the United States," Mr Halverson said.
"The regulation arbitrage - avoidance - is over."
However, Toby Blyth, partner at law firm Colin Biggers & Paisley, said regulation could make it easier for large US credit providers to operate in Australia, providing more competition.
"They will either sell or obtain relevant US credit licences, which means that they can work in Australia with a minimum of regulatory cost friction," Mr Blyth told Savings Media Group.
"This may mean that the four pillars [major banks] in Australia, busy buying up BNPL here, may face competition from offshore providers who can easily afford to license a subsidiary in Australia."
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