Afterpay and the End of the BNPL Regulatory Gap

Afterpay is the clearest example in Australian business of a company built in a regulatory gap, and of what happens when the gap is closed. The product was genuinely useful and the growth was genuinely extraordinary, and both depended on a structure that meant consumer credit law did not apply. This article covers how the model worked, why the regulation arrived, and what the sector looks like now that it has.

How did Afterpay actually make money?

Primarily from merchants. A retailer accepting Afterpay pays a fee substantially higher than a card processing fee — typically several percent of the transaction — in exchange for the customer completing a purchase they might otherwise have abandoned, and often spending more than they would have.

The merchant case was strong enough to justify the cost. Retailers reported higher conversion rates and larger average basket sizes, and Afterpay bore the credit risk entirely, paying the merchant in full immediately. From the retailer’s perspective it was a guaranteed sale with immediate settlement, which is worth paying for.

Late fees were the second revenue stream and the source of most criticism. Consumers who missed instalments paid capped fees, which was defensible as a behavioural incentive and uncomfortable as a business model, since it meant revenue partly depended on customers failing to manage repayments.

Why did it grow so fast?

Because it solved a real problem for a specific demographic at exactly the moment e-commerce accelerated. Younger Australians were structurally averse to credit cards after the financial crisis, and Afterpay offered short-term instalments without interest, without a formal credit application and without an ongoing revolving balance.

Adoption in Australia became among the highest in the world — roughly 40% of customers aged 18 to 39 used buy now pay later in 2023, and BNPL transactions reached around A$19 billion in a financial year, approximately 2% of all Australian card purchases. The pandemic then accelerated everything, as e-commerce volumes surged.

Merchant network effects did the rest. Consumers chose retailers that offered Afterpay, which pushed retailers to add it, which made it more useful to consumers. That dynamic is what allowed a company valued at around A$100 million at listing to become the subject of a takeover announced at around US$29 billion five years later.

Why did regulation eventually arrive?

Because the product functioned as credit while sitting outside credit law. Consumers were taking on repayment obligations without an affordability assessment, without the disclosure requirements that apply to credit contracts, without access to hardship provisions, and without the external dispute resolution that credit customers can use.

Evidence of harm accumulated in the specific places you would expect: consumers holding multiple BNPL accounts simultaneously with no single view of total obligations, use of the product for essentials rather than discretionary purchases, and financial counsellors reporting BNPL debt as a growing component of hardship cases.

The response was proportionate rather than prohibitive. From 10 June 2025, BNPL providers must hold an Australian credit licence authorising credit activities and be AFCA members, operating under a tailored low-cost credit framework overseen by ASIC. The design deliberately treats BNPL as a distinct category rather than applying full credit card rules, and Afterpay publicly supported a fit-for-purpose framework.

What happened to the listed BNPL sector?

It collapsed and then rationalised. At the peak of the pandemic boom Australia had many BNPL providers with substantial listed valuations, and most subsequently fell around 90% from their highs as interest rates rose, funding costs increased and investors reassessed businesses that were growing volume without generating profit.

The rate cycle exposed the fundamental weakness. A BNPL provider funds consumer purchases and recovers the money over weeks, so it needs working capital, and the cost of that capital had been close to zero. When funding costs rose, the economics of a business earning a few percent per transaction deteriorated sharply, and the growth-at-any-cost model became unsustainable.

What remains is a smaller, more concentrated sector operating as a regulated credit product distributed inside retail and e-commerce checkouts rather than as a standalone consumer proposition. Large marketplaces have expanded BNPL options at checkout while banks have launched competing instalment products, which is roughly what a maturing payments category looks like.

What should founders learn from Afterpay?

First, that regulatory arbitrage is a real and temporary advantage. Building outside a regulatory perimeter allows speed and cost advantages incumbents cannot match, and it works until the harm becomes visible enough to prompt legislation. Planning for that arrival — and engaging constructively when it comes — is the difference between adapting and being destroyed.

Second, that the exit is a judgement about the cycle as much as about the business. Afterpay’s founders sold at close to the peak of a valuation environment that has not returned, in a transaction that made them among Australia’s wealthiest people. Whether Block ultimately earned an adequate return on that price is a separate question from whether selling was the right decision.

Third, that a product solving a genuine need can survive its own regulation. Buy now pay later did not disappear when licensing arrived; it became a supervised credit product with clearer obligations. Founders building in emerging categories should assume the endpoint is regulation rather than exemption, and design a business that works under it. Our profile of Airwallex covers a fintech that chose the licensed path from the outset.

How does BNPL compare with a credit card?

Structurally it is a short-term instalment loan with no interest and a capped late fee, repaid over roughly six to eight weeks. A credit card is a revolving facility with an interest rate that applies to any balance carried beyond the interest-free period, plus annual fees and a formal credit assessment at application.

For a disciplined user paying in full each month, a credit card is cheaper because it carries no cost and may earn rewards. For a user who would carry a balance, BNPL is cheaper because the instalments are interest-free. The difficulty is that the second group is also the group most likely to miss payments and incur late fees.

The regulatory concern was the absence of a single view. A consumer could hold several BNPL accounts across different providers with no comprehensive credit assessment, accumulating obligations that no individual provider could see. Bringing the sector inside the credit framework, with affordability checks and AFCA membership, was aimed squarely at that gap.

One frequently overlooked point about the Block transaction: it was an all-scrip deal, meaning Afterpay shareholders received Block shares rather than cash. The headline value quoted at announcement reflected Block’s share price at that moment, and Block’s shares subsequently fell substantially. The economic outcome for Afterpay shareholders who held their scrip was therefore considerably lower than the announced figure, which is a standard feature of large scrip transactions and a standard source of confusion when they are described afterwards. When assessing any acquisition, check whether the consideration was cash or shares before treating the headline number as value delivered.

What does the sector look like after regulation?

Smaller, more concentrated and distributed differently. The Australian alternative lending market is forecast to grow substantially, with BNPL and instalments centred on Afterpay and Zip, global players such as Klarna competing through international merchant relationships, and providers including humm having adjusted product sets in response to the new regime.

The distribution model has shifted decisively toward embedded credit. Rather than acquiring consumers directly, providers increasingly appear as a payment option inside retail and e-commerce checkouts, with large marketplaces expanding BNPL availability and banks shipping competing instalment products of their own. That is a lower-margin, higher-volume position than the standalone consumer brand of the growth years.

For merchants, the practical effect is more choice and more comparable products. When every provider must meet the same licensing, affordability and dispute-handling standards, the differentiation moves to merchant fees, conversion performance and integration quality. That is a healthier competitive basis than regulatory arbitrage, and it produces thinner margins for everyone.

For merchants evaluating whether to offer BNPL, the arithmetic is worth doing explicitly rather than assuming. The fee is materially higher than card processing, so the product only pays for itself if it genuinely lifts conversion or basket size rather than simply providing an alternative payment method to customers who would have purchased anyway. The measurement that matters is incremental revenue attributable to the option, not total revenue transacted through it — and the two figures are frequently very different.

Finally, the transitional arrangements are worth understanding for anyone in the sector. Providers were given time to obtain licences and establish AFCA membership rather than being required to comply overnight, which is standard practice for a new regulatory perimeter and which allowed the market to adjust without service disruption. That design choice is why the reform produced consolidation pressure rather than sudden exits.

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