Australia's Afterpay says some BNPL users told to close accounts, then sold credit cards

Afterpay, an Australian BNPL provider owned by Block, revealed that over 10% of its customers were advised to close their accounts by banks or mortgage brokers to qualify for a mortgage, and were then offered credit cards. Afterpay suggests banks are leveraging a perception of BNPL users as high-risk to protect declining credit card lending, as Australian credit card debt has fallen 30% in five years. New legislation requiring BNPL firms to conduct credit checks on borrowers began Tuesday, aiming to increase transparency around user creditworthiness, according to Afterpay.

Analysis

Afterpay, a key Australian Buy Now, Pay Later (BNPL) provider owned by Block Inc. (SQ), reports that over 10% of its surveyed customers have been asked by banks or mortgage brokers to close their BNPL accounts to qualify for mortgages, often being subsequently offered credit cards. This practice occurs as Australian interest-accruing credit card debt has declined by 30% over five years, leading Afterpay to suggest that traditional lenders may be leveraging a perception of BNPL users as riskier to protect their diminishing credit card business. Afterpay, which serves over 3.5 million active monthly users representing half of Australia's total BNPL accounts, contends its users possess credit scores and repayment records broadly comparable to those of credit card users. The dynamic is highlighted by new Australian legislation, effective Tuesday, requiring BNPL firms to conduct credit checks, a move Afterpay's Head of Public Policy, Michael Saadat, believes will improve transparency around user creditworthiness and address lender misperceptions. While major lenders Commonwealth Bank (CMWAY) and National Australia Bank (NABZY) deny instructing applicants to close BNPL accounts, ANZ acknowledges that customers might choose to close such accounts to bolster mortgage applications based on an overall financial assessment. Mortgage broker AFG also cited responsible lending obligations. The mildly negative sentiment (-0.2) associated with Block Inc. (SQ) likely reflects these competitive pressures and the evolving regulatory landscape for its BNPL operations.

Key Decisions for Investors

• Investors in Block Inc. (SQ) should monitor the impact of increased scrutiny from mortgage lenders on Afterpay's customer retention and the perceived risk profile of BNPL products, especially as this could influence loan application outcomes for consumers.
• The new Australian BNPL regulations requiring credit checks could legitimize the sector but may also introduce friction to user acquisition or affect loan origination volumes for Afterpay; its ultimate effects on credit quality, operational costs, and market perception warrant close observation.
• Given Afterpay's assertion that banks are acting to protect their declining credit card businesses, investors should assess the evolving competitive landscape between BNPL providers and traditional financial institutions, particularly concerning customer acquisition strategies and the potential for further regulatory interventions.
• Consider the potential for these developments in Australia, a significant market for Afterpay, to influence its growth trajectory and profitability, and remain alert for similar trends or regulatory responses in other international markets where Block's BNPL services operate.