SYDNEY (Reuters) - The Australian government on Wednesday introduced legislation that would require buy-now-pay-later (BNPL) firms to run credit checks on borrowers, aiming to regulate the rapidly growing sector popular among youth like other consumer credit products.

BNPL companies typically offer on-the-spot interest-free short-term loans with minimal credit checks that spread payments over weeks or months and are largely used by cash-strapped people taking on debt, sometimes more than they can afford.

Up to now, the sector has avoided rules that apply to credit card providers as BNPL firms make most of their revenue through merchant fees, rather than interest payments.

Under the proposed new laws, BNPL providers must hold an Australian credit licence, putting them under the watch of the corporate regulator, the Australian Securities and Investments Commission.

"If it looks and acts like credit, then it should be regulated as such," Minister for Financial Services Stephen Jones said in a statement.

The legislation would set up a new category of "low-cost credit" to reflect the lower risk and cost of BNPL compared with other regulated forms of credit, he said.

BNPL business surged amid an online shopping frenzy spurred by stimulus payments during COVID-19 and ultra-low interest rates, but concerns about repayments have been rising as Australia battles sticky inflation.

Gen Z consumers, or those aged between 18 and 25, form the majority of BNPL users, data from fintech firms shows.

Home to about a dozen listed BNPL providers, Australia had about 7 million active BNPL accounts with an average transaction amount of A$136, according to treasury data released last year.

BNPL firm Zip Co's co-founder, Peter Gray, welcomed the government's announcement and said the legislation would align with the company's existing practices.

Afterpay, owned by Jack Dorsey's Block Inc ( SQ ), did not immediately respond to a request seeking comment.

($1 = 1.5029 Australian dollars)