Analysis: Australia’s buy-now-pay-later market faces a new obstacle in the form of regulations.

When Melbourne barista Melinda Elliott had to cut back on her casual work shifts this year, she asked her buy-now, pay-later (BNPL) provider, Afterpay, to lower her credit limit. She didn’t want debt that she couldn’t pay back.

The Australian company, which is owned by Block Inc., which is run by Twitter founder Jack Dorsey, cut her limit from $3,000 to $2,000 ($1,300). However, after a few months, when she added up her debts, she saw that the limit had gone back up to $3,000, which is the maximum amount.

“There was no email saying, ‘Your credit limit has been raised again,'” Elliott said over the phone. “I don’t want to spend more than I can pay for with the money I earn.”

Related: The head of Australia’s central bank says he or she is sorry for past rate guidance.

Elliott’s experience shows a key part of a new business model that has changed the way people around the world handle their money. But Australia may soon ban this and other features like it if a plan to regulate BNPL with the same law as credit card and mortgage providers goes through.

Credit card companies get money from both interest payments and fees from retailers, but BNPL companies get customers by not charging for credit and instead getting almost all of their money from retailers. By keeping an eye on how well people pay back small loans, they can control risk without having to do background checks. This makes signing up easy and keeps costs down for the companies.

Since they don’t charge interest, they aren’t subject to consumer credit regulations, and their business has grown rapidly during a COVID-19 shopping frenzy and a time when interest rates are very low.

Now, it faces a problem because Australia, which has more than a dozen listed providers, is looking into giving shoppers more protections. According to a discussion paper released by the Treasury on November 21, one way to do this would be to bring the providers under the National Consumer Credit Protection Act, which bans unasked-for credit limit increases and requires background checks for most consumer loans.

Shares of the companies, which went up a lot in the first two years of the pandemic, are already going down sharply in 2022. This is because investors think that BNPL users will shop less and may have trouble paying off their balances because inflation is high and interest rates on their other debts are going up.

If they have to follow normal rules for consumer credit, they will also lose the main things that make them competitive.

CREDIT LIMITATION

“It would make it harder for the companies to make money,” said Jamie Hannah, deputy head of investments and capital markets at VanEck Australia. VanEck Australia owns Block shares that are listed in Australia, following Block’s acquisition of Afterpay earlier this year.

Hannah said that if BNPL companies have to follow the Credit Act, “maybe credit isn’t as easy to get for everyone who wants it.” “Everything needs to be looked at in light of how things are now.”

Even though Britain, the United States, where BNPL provider Affirm Holdings Inc. is based, and Sweden, where competitor Klarna is based, all plan to regulate BNPL, no country has done so yet.

Afterpay and other BNPL providers have until Dec. 23 to respond to the discussion paper. Afterpay said that its current system of rewarding on-time payments with higher credit limits and punishing late payments with lower limits gave a more accurate picture of a shopper’s ability to pay back debt than the one-time checks that credit-card providers require.

Afterpay’s vice president of regulatory affairs, Michael Saadat, said, “We would worry that this kind of proposal would have the unintended effect that providers wouldn’t be able to start customers off with low spending limits like we do.”

“We don’t want any new rules to make it harder for us to keep making products that are good for consumers and have been for a long time.”

Related: The S&P/ASX 200 was up 0.14% at the close of trading, lifting Australian stocks.

When asked about Elliott’s experience with Afterpay, a company rep said that customers could always ask to have their limits lowered. The spokesperson didn’t say anything about the limits going back up without being asked to.

Zip Co Ltd, the second player, supports regulation and already has a line-of-credit product that must adhere to the Credit Act. If changes were made that required it to do the same for BNPL, the company’s managing director for Australia, Cynthia Scott, said that “little or no change” would be made to the company’s procedures, depending on how the changes were written.

The Australian Securities and Investments Commission, which is in charge of the Credit Act, told Reuters that it was “in favor of regulating the BNPL sector.”

The government wants a change to the law by the end of 2023.

FADING APPEAL

Even so, the industry may not be as interesting as it used to be.

According to research done for Reuters by analytics firm SimilarWeb, there have been fewer online searches for market leader Afterpay every month since June. Zip searches have been going down all year.

David Carr, a senior insights manager at SimilarWeb, said, “It’s clear that economic pressures and rising interest rates are starting to hurt spending on things you don’t have to.”

Tom Beadle, an analyst at UBS, said that once the rules were in place, some accounts would be closed.

He asked, “Is it one more account that gets closed, or a million?” “You can’t figure that out.”