Many retailers use buy now, pay later (BNPL) services to boost sales, particularly to younger Australians, so it’s important for the sector to understand the issues that have prompted the government to propose new laws, and how retail businesses can navigate the new regulations to seize the opportunity it presents.

After several months of industry consultation, the federal government announced in May it will regulate the BNPL industry under the Credit Act to better protect consumers against financial abuse by the lending schemes. BNPL services will be treated as a credit product, with providers required to have a credit licence, hardship requirements and minimum standards for conduct.

The exposure draft legislation will be out for consultation later this year, with the government intending to introduce the final bill into Parliament by the end of 2023. In addition, AUSTRAC is expected to amend the AML/CTF Act (Anti-Money Laundering and Counter-Terrorism Financing) in the year ahead. This poses a challenge and opportunity for the BNPL industry and retailers, and digital ID verification is set to become a vital part of customer onboarding to meet the minimum standards of compliance.

BNPL regulation

Tougher regulation is undoubtedly needed as BNPL products pose “growing dangers to consumers, which up until now have been largely unregulated and unchecked”, according to a recent speech by Financial Services Minister Stephen Jones. People are currently able to open multiple BNPL accounts to access far more debt than they’d be able to get on a credit card or a payday loan. This can lead to serious financial consequences for some members of our community.

There are roughly seven million active BNPL accounts in Australia alone. One major risk associated with BNPL is people tend to overspend on items they wouldn’t normally be able to afford if they had to pay upfront – leading to excessive debt that may be difficult for some people to manage.

The first step in responsible lending (which is the focus under the Credit Act) is to know the person you’re lending the money to – i.e. verify their identity. This is at the heart of a trusted remote business relationship. Lenders use IDVerse’s (formerly OCR Labs) biometric verification technology to prove a customer’s identity before opening an account. By granting access to the camera on your mobile phone, the facial recognition technology matches your face to the photo on your driver’s licence.

This helps protect customers from identity theft, ensures their account is secure, and enables organisations to comply with laws and regulations. IDVerse’s Zero Bias AI also addresses ways to ensure inclusion and fairness by protecting against algorithmic bias or systemic discrimination in identity verification for our community.

The shift to perpetual KYC utilising AI

BNPL providers must apply ‘Know your customer’ (KYC) procedures to all their customers. These

include checking their identity by collecting and verifying information before providing any designated services to them. Credit providers have statutory obligations to verify the identity of their customers under the AML/CTF Act, and the government proposes to specify how those obligations are to be met in the amendment. I expect a shift to perpetual KYC utilising AI to follow this change.

As already extensively offered in Australia, IDVerse can provide KYC compliant ID verification. Performing upfront KYC is simple – the skill is in perpetual KYC. We have the technology to perform this using our IDV flows coupled with “Face Auth” reverification. Perpetual KYC is increasingly becoming a necessity for organisations. Its benefits significantly outweigh any challenges – both in terms of efficiency gains and the effectiveness of mitigating risk.

Traditionally, organisations perform KYC checks at onboarding, classifying clients into categories of risk – high, medium, low. Thereafter, client information is typically refreshed periodically, following a one, three, or five-year cycle. In contrast, perpetual KYC is the practice of maintaining accurate client data, through updates based on changes in clients’ behaviours and circumstances in near real-time. Unlike cycles of remediation, perpetual KYC is a continuum.

In conclusion, the expected new regulations will require identity checks to ensure BNPL providers can perform responsible lending obligations. Credit products will require KYC and there will be a push to perpetual KYC once AUSTRAC’s AML/CTF regime is simplified. The new laws will bring in guidelines for KYC that will herald a new phase of the digital age, and IDVerse is ready to meet that challenge to help retailers seize the opportunity for growth and better serve their customers.

Paul Warren-Tape is general manager for APAC at IDVerse.