Buy now, pay later players won’t be asked to pass on retailer fees to shoppers for now, says RBA
Buy now, pay later providers such as Afterpay and Zip can continue to prevent retailers imposing a surcharge when shoppers use the services, Reserve Bank governor Philip Lowe says.
But he indicated that as these services grow in popularity they could be forced to play along the same rules as credit card companies, which analysts have previously warned could dent their growth.
In a recent review of the sector, Australia’s corporate watchdog ASIC said one in five consumers using buy now, pay later miss payments, but stopped short of imposing new regulation on the sector.
Investors have been awaiting whether the Reserve Bank of Australia (RBA) would impose regulatory changes.
Currently, the ‘no surcharge’ rules restrict the ability of merchants to pass on the costs of providing these buy now, pay later services to customers.
Afterpay’s business model is built around customers not paying for the service, unless they are late and then the customer gets charged late fees.
In contrast, debit and credit card providers cannot prevent merchants from adding a surcharge to cover payment costs.
Retailers have to date accepted paying the fee, which is far higher than what they pay to take card payments, because companies like Afterpay have been growing rapidly and referring new customers to them.
But in October last year, the RBA announced a review of the ‘no surcharge’ rules imposed by buy now, pay later operators.
The RBA’s review of the industry had been delayed by COVID-19, with a decision not expected until next year.
Dr Lowe indicated that for the time being the RBA was unlikely to force buy now, pay later operators to pass on the costs of the service to shoppers.
“The board’s preliminary view is that the buy now, pay later operators in Australia have not yet reached the point where it is clear that the costs arising from the no-surcharge rule outweigh the potential benefits in terms of innovation,” Dr Lowe told the Australian Payments Network on Monday.
“So consistent with its philosophy of only regulating when it is clear that doing so is in the public interest, the board is unlikely to conclude that the buy now, pay later operators should be required to remove their no-surcharge rules right now.”
‘Banks charge merchants too much’: RBA
But Dr Lowe said the 15-cent cap on what banks can charge merchants on customer card transactions was too high and would need to come down.
He said banks were making as much as 3 per cent when a customer made a $5 purchase, and this was “far higher than would apply to that transaction if a credit card had been used”.
“Over the coming months, bank staff will be seeking further information from the industry on this issue as the [RBA] board considers a lower cap,” Dr Lowe said.
He also indicated that at some point regulation could change for buy now, pay later operators.
The board expected that “over time, a public policy case is likely to emerge for the removal of the no-surcharge rules in at least some buy now, pay later arrangements”.
He said currently even the largest providers (Afterpay and Zip) account for a small proportion of total consumer payments in Australia, “notwithstanding their rapid growth”.
“New business models are also emerging, including some that facilitate payments using virtual cards issued under the designated card schemes that are subject to the existing surcharging framework,” Dr Lowe said.
“In addition, the increasing array of buy now, pay later providers is resulting in competitive pressure that could put downward pressure on merchant costs.”
Would customers keep using BNPL if they had to pay more?
In a research note earlier this year, UBS analysts noted that “somewhat paradoxically” the more successful BNPL services are, the more likely they were to attract regulatory scrutiny.
UBS estimated Afterpay and Zip’s merchant charges could be as high as 6 to 7 per cent, but customers were generally unaware of buy now, pay later players’ cost to merchants.
It said, once made aware, 45 per cent of users stated they would not use buy now, pay later at small businesses and 33 per cent at large businesses.
“This is compelling evidence that, if there is transparency, ‘free-riders’ may use buy now, pay later significantly less, which may result in adverse customer selection (higher credit risks) and lower sales growth for buy now, pay later businesses,” UBS had said.
Dr Lowe noted that some buy now, pay later operators were “growing rapidly and becoming widely adopted by merchants, particularly in certain sectors”.
“As part of the [RBA’s] ongoing consideration of this issue, bank staff will be discussing with industry participants possible criteria or thresholds for determining when no-surcharge rules should no longer be allowed,” he said.
“If the point is reached where the board’s view is that the public interest would be served by the removal of a no-surcharge rule, the board’s preference would be to reach a voluntary agreement with the relevant provider.”
This would be similar to the approach adopted with American Express and PayPal.
“In the event that this were not possible, the bank would discuss with the Australian Government the best way to address the issue,” Dr Lowe said.
A recent Senate inquiry into fintech found that consumers don’t need to have legal protections when they use buy now, pay later services like Afterpay and Zip, because those companies can just self-regulate.
Zip co-founder and chief operations officer Peter Gray said the fintech’s services was different to credit cards in that Zip did not charge customers interest.
Consumer advocates argue that while players like Zip may not charge interest, they do charge customers late payment fees and account keeping fees.
Mr Gray said Zip also provided merchants “lots of added services, such as marketing and customer referrals, customer insights and fraud and chargeback protection”.