What could this proposed regulation mean for Zip shares?

The Zip Co Ltd (ASX: ZIP) share price is down 2.33% in early trading to 64 cents per share. Meantime the S&P/ASX All Ordinaries Index (ASX: XAO) is up slightly by 0.3%.

It’s been a shocker of a year for the buy now, pay later (BNPL) ASX share. The Zip share price is down 85% in the year to date. Yikes.

The company is trying to turn things around by abandoning its seemingly growth-at-all-costs strategy.

But there are other headwinds for the Zip share price that are not in the company’s control.

One of them is proposed regulation.

What’s next for the Zip share price?

According to reporting in the Australian Financial Review (AFR) today, the federal treasury department will soon publish an options paper regarding three proposed models for new regulation of BNPL services.

One model proposes credit checks for all BNPL customers.

This issue has been hanging over the heads of BNPL companies for years. In a nutshell, there is a global debate as to whether BNPL companies should be considered credit providers. This would make them subject to more rigorous regulations.

Currently, they’re not because they don’t charge customers interest. Many of them do charge late fees but their main revenue comes from merchants.

Shops are motivated to pay providers like Zip for their services because BNPL allows customers to buy things ‘on time’ but with immediate access to the product or service purchased. This can lift merchants’ revenue.

Why are credit checks a problem for BNPL providers?

Basically, it slows down the customer recruitment process. But here’s the thing. Any such regulation may not impact Zip as much as other BNPL providers because it already conducts credit checks. Zip has distinguished itself from rival BNPL services like Afterpay in doing so.

But if new regulation is imposed on the industry, Zip shares may get caught up in any negative market response anyway.

According to the AFR, there are three proposed models.

The first is strengthening the existing self-regulatory industry code. The Australian Finance Industry Association (AFIA) administers the code and an independent committee enforces it. The proposal is to make it enforceable by the Australian Securities and Investments Commission (ASIC). 

The second is requiring more detailed customer credit checks on all BNPL loans. This is already in place for large loans but not the smaller ones typical for retail purchases.

The third is creating an entirely new regulatory regime for the BNPL sector.

The government will seek industry feedback on the proposals after the options paper is released.

What’s the latest from Zip?

Zip reported its Q1 FY23 results on 20 October. The market responded positively with the Zip share price soaring 13% on the day of the announcement.

Zip reported a 19% revenue increase to $163.2 million.

Zip CEO Larry Diamond said:

We are pleased to deliver another solid set of numbers as Zip resets and moves toward positive cash flow, taking control of our future.

During the quarter we made great progress on our refreshed strategy to deliver sustainable growth, right-size our global cost base and accelerate our path to profitability.

The post What could this proposed regulation mean for Zip shares? appeared first on The Motley Fool Australia.

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More reading

• Why is the Zip share price up 5% on Tuesday?
• Why has the Zip share price dumped 12% in October?
• Could this represent another nail in the Zip share price coffin?
• Zip shares have fallen 85% this year but Diamond still says ‘We can be the next CBA’
• How has the Zip share price been tracking in October?

Motley Fool contributor Bronwyn Allen has positions in ZIPCOLTD FPO. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has positions in and has recommended ZIPCOLTD FPO. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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