By Byron Kaye

SYDNEY (Reuters) -Some customers of Australia's Afterpay have been asked to close buy-now-pay-later accounts to qualify for a mortgage and offered a credit card upon qualification, the BNPL provider said on Tuesday, underscoring fierce competition in the consumer finance sub-sectors.

BNPL loans, on-the-spot interest-free short-term loans with minimal credit checks, exploded as an alternative for younger shoppers after the COVID-19 lockdowns and stimulus payments spurred an online shopping frenzy. Customers are incentivised to pay on time by the promise of maintaining or increasing their borrowing limit.

In a survey of 1,000 of its customers, Afterpay said more than 10% reported being offered a credit card by the same bank or mortgage broker that told them to close their BNPL account to qualify for a loan, without specifying which banks or brokers.

Owned by U.S. tech billionaire Jack Dorsey's Block, Afterpay leads Australia's BNPL market with more than 3.5 million active monthly users, half the country's total BNPL accounts, according to government figures.

Lenders are required by law to make reasonable inquiries about an applicant's finances but may not give financial advice.

Spokespeople for Commonwealth Bank of Australia, the biggest lender, and No.3 lender National Australia Bank told Reuters that they did not tell applicants to close their BNPL accounts.

A spokesperson for No.4 lender ANZ said the bank assessed BNPL liabilities alongside a person's other finances and "depending on the customer's overall financial position, goals, and objectives, they may choose to restructure or close certain debts – such as BNPL accounts – to support their application".

TO RISK OR NOT TO RISK

Afterpay claimed banks were capitalising on a perception of BNPL users as riskier than traditional borrowers to protect a declining lending category.

Australian interest-accruing credit card debt is down 30% in half a decade as borrowers seek cheaper options.

The company added that its survey found BNPL users had credit scores and on-time repayment records broadly in line with credit card users.

The BNPL model has avoided regulation under Australian consumer credit laws so far as it doesn't involve interest. However, "if it looks and acts like credit, then it should be regulated as such," the Australian government had said last year.

New legislation requiring BNPL firms to run credit checks on borrowers kicks in on Tuesday, which, Afterpay's Head of Public Policy Michael Saadat hopes, would improve transparency around user creditworthiness.