Entry of the big banks puts BNPL on regulation path

The arrival of major banks in the BNPL space will bring more regulation.

Just one day after Commonwealth Bank launched its assault on the “buy now, pay later” sector, the federal government failed to get its repeal of the responsible lending laws through the Senate, with May now the earliest possibility for that change.

CBA has followed US giant PayPal into the market, and their entry not only endorses the product, it makes regulation of the sector almost inevitable.

That is not so palatable for the start-ups.

The entry of the big guys follows the US, where Citibank has done a deal with Amazon that gives it exclusive access to transactions on the service that accounts for more than half US online orders.

This is the way competition works: newcomers innovate until such time that the established players see margins threatened and come in demanding a level playing field.

This won’t bother market giant Afterpay, but some of its smaller rivals will have to think twice — including the likes of Openpay, which appears to be offering hospital payment terms that could lead to the unfortunate situation where the dead are charged late fees.

The banks have already run foul of that caper in the fees-for-no-service scandal in the royal commission.

ASIC has warned it will use its design and distribution obligation rules against BNPL companies that target people who can’t pay their bills.

It administers the consumer credit laws, but argues these do not apply to BNPL because they are short-term transactions and no interest payments are charged.

They do charge late fees, and bad debts totalling $267.8m account for 30 per cent of revenues.

It is figures like these that make you wonder.

Retailers in Australia are allowed to pass on surcharges that credit card companies charge retailers, but BNPL firms preclude this, which means retailers can’t pass on the surcharge.

This also keeps them away from regulations, but it is a fine line because inevitably retailers will lift prices to maintain margins.

Retailers are not impressed and, against the 6 per cent fee charged by Afterpay, CBA at 1.4 per cent looks more promising.

It’s an issue of who owns the customer and Afterpay argues its network is like the old shopping malls, so Anthony Eisen and Nick Molnar are the Frank Lowys of this generation.

They argue retailers welcome the new customers they bring to the door and the fact more transactions are made using their service.

This was argued in a report from Credit Suisse this week, but retailers say the claim is nonsense.

Still there is no disputing the sector is now established it seems because younger people would prefer to use it than credit cards.

This said, McLean Roche figures show BNPL accounts for $9bn in payments out of a $1.3 trillion sector and a fraction of the $400bn sitting on debit cards.

After seven years in the game, that is relatively slow progress.

None of the nine listed stocks on the bourse have reported a profit, yet leader Afterpay in the last 12 months has outperformed the market by a stunning 736 per cent. These gains have come about even if the bond market rally has sent it down since mid-February, when it has underperformed by 26 per cent.

Now for the first time the local market is competitive and the ­battle lines are drawn. 

Answering AmCham on FIRB

In the face of criticism from the American Chamber of Commerce on the operation of the Foreign Investment Review Board, Josh Frydenberg told this column: “Australia remains open for business and recognises foreign investment for the significant benefits it provides but also seeks to ensure that investments are not contrary to the national interest.”

The law “balances the need for Australia to remain an attractive destination for foreign investment, maintain public confidence in the integrity of our investment framework, and protect Australia’s national interest and national security,” the Treasurer said.

Frydenberg added: “We have committed to reviewing the implementation of our reforms before the end of this year.”

Lawyers have obviously done well under the new rules with plenty more work, but complain that FIRB is too dominated by ­national security issues.

In reality this complaint applies to many other jurisdictions and, like all regulations, is a work in progress.

Only a tiny percentage of deals are blocked and the average application is cleared within 46 days.

This column has criticised the lack of consistency, with China’s Mengniu cleared to buy Bellamy’s in September 2019 and just months later Frydenberg ignored FIRB suggestions and blocked its purchase of Lion Dairy.

National security as it applies to commercial deals is a work in progress.

New chief at EY

EY has named David Larocca as the new Oceania CEO and regional managing partner, filling one of the three gaps in the big four accounting firm’s leadership.

KPMG and Deloitte are also looking for new bosses.

Larocca became a partner in 2006 and took over as strategy and transactions managing partner in 2016.

An infrastructure specialist, Larocca has more than 25 years of experience advising government and private sector clients on major infrastructure transactions in Australia, Asia and Europe.

He will take over the reins from former auditor Tony Johnson, who has been boss since 2014, during which time the organisation has grown revenue from $1.1bn to more than $2.2bn.

Most of the top brass at EY have come from the strategy and transactions side of the business.

He worked overtime on EY culture in an attempt to mould the firm’s talents into being more agile, bold and confident.

The Melbourne-based Johnson excelled managing during the COVID lockdown most of the time and he kept staff informed with weekly chats featuring his dog Lucy the labradoodle.

Larocca, 47, has a cavoodle named Cocoa and is a soccer tragic, backing Italian team Fioren­tina, which is another change in style given his predecessor is an Essendon Bombers AFL fan.

How women can win from the budget

If the government wants to increase economic growth it makes sense to start with childcare costs to increase worker participation rates. Picture: Paul Riley

Tis the time of year for budget submissions for Treasurer Josh Frydenberg and one of the easiest for him to accept is from chief executive women to embed a gender lens in the budget and policy process and ensure gender balance in decision-making spaces and structures.

For a politician the logic in the Chief Executive Women paper is clear and on KPMG figures halving the present 10 per cent participation rate gap would add $60bn to GDP by 2038.

ABS figures show work age people in work or looking for are 61.2 per cent female and 71.2 per cent male.

Covid was tougher on women and government funding tended to go to male dominated sectors like construction, energy and manufacturing.

Women dominate sectors like retail, hospitality, tourism and healthcare were less supported and by way of example $1m spent on education will support 10.6 women and 4.3 men and everyone wants more spent on education.

By contrast every $1m spent in construction means one more male job and 0.2 female jobs.

Superannuation will be a budget policy issue with speculation Frydenberg will use it to outline the government’s position on the guarantee which increases to 9.5 per cent on July 1 and is slated to increase to 12 per cent in June 2026.

The system works best for those in continuous employment and the government could offset this by extending the guarantee to paid parental leave.

Child care is a big one with CEW urging an increase in the subsidy from 85 to 95 per cent for families earning under $80,000 with 1 per cent deducted for every $4000 above that.

This means a family earning $180,000 would receive 70 per cent.

Child care is the key to increasing female participation yet the system is loaded against it starting from families earning $67,000 a year where the worker disincentive is 89 per cent rising up to 120 per cent for higher income levels.

For a family earning $99,000 with one parent on $55,000 and another on $24,000 for three days child care for two children equals $5700.

The parent working three days can now work four days a week which means child care costs rise to $8700 and the extra take home pay equals $32 a week.

Covid has meant a couple earning a combined $200,000 get their pay cut to $175,000 but because they are in the same subsidy zone their child care costs stay the same for four days care at $20,800 a year.

If the government wants to increase economic growth it makes sense to start with childcare costs to increase worker participation rates.