(17 October 2019 – Australia) The Reserve Bank of Australia (RBA) is reviewing policy issues relating to the ‘no surcharge’ rule as part of its 2020 review of card payments regulation, raising serious doubts about the business models of ‘buy now pay later’ companies such as Afterpay.
The RBA is reviewing plans to intervene in rules that prevent retailers applying surcharges on consumers using ‘buy now, pay later’ (BNPL) schemes such as Afterpay and ZipPay, raising concerns about their operating models.
As the sector expands rapidly the RBA has given its most explicit signal yet that it could take policy action over the cost to merchants of accepting such payments. Visa has also released plans of launching a rival BNPL offering in the US in 2020. The RBA has intervened in the credit and debit card market in the past to allow merchants to impose surcharges for electronic payments. The RBA observes merchants typically incurring a ‘much higher’ fee for using BNPL schemes than for credit or deposit cards, and they were prevented from passing this on in the form of surcharges.
“It can be problematic for merchants that feel compelled to offer BNPL services as a payment option for competitive reasons but are unable to recoup the merchant fees from the customers that directly benefit from the service” the RBA said in a statement. In the RBA’s Payment Systems Board annual report, the payment’s regulator highlighted a sharp increase in payments processed by Australian BNPL providers to A$6 billion in 2018/19 from more than A$3 billion in 2017/18.
East & Partners latest H2 2019 Merchant Payments research, based on direct interviews with 2,246 merchants across Australia, reveals BNPL product acceptance has skyrocketed in the last year with the overall cost of acceptance presenting as the most influential factor in merchants’ payment product acceptance decision making process.
UBS analysts Jonathon Mott and Tom Beadle raised concerns in a recent client report that the RBA could force BNPL companies to remove one of the key competitive features of their business model, initiating a sharp sell-off in Afterpay's share price by highlighting regulatory risk by highlighting that if consumers saw the full price of Afterpay it would cause risks to growth.
Under the current operating model, retailers are prevented from recouping the cost of acceptance charged by Afterpay on transactions. While the restriction has made BNPL services more attractive to some consumers than credit cards, UBS expects that the surcharging ban will be targeted by regulators.
“Afterpay’s model relies on prohibiting merchants from passing on Afterpay’s costs to customers. For credit and debit cards in Australia, merchants cannot legally be prevented from passing on costs. If customers are presented with the true cost of buy now pay later, we see risks to growth” UBS stated in the report.
“If merchants started to charge a surcharge for paying via Afterpay it would be a risk to the business model. I think it's significant because the whole business model is on the basis that the consumer does not have to pay anything if they pay on time” said Morningstar analyst Chanaka Gunasekera.