RBA to examine Afterpay, Zip Co’s impact on merchants

The Reserve Bank says the buy now, pay later sector may be unfairly squeezing merchants.

Afterpay CEO Anthony Eisen. Friday 11th Jan 2019 Photo by Natalie Grono

The Reserve Bank of Australia is keen on a closer examination of the burgeoning buy now, pay later (BNPL) sector and whether the likes of Afterpay and Zip Co could force traditional card payments operators to squeeze merchants harder.

According to the RBA, the popularity of BNPL payments with consumers is leaving merchants with few options other than to sign up with the services, which cost them more than accepting other payment methods such as cards.

One key concern for the bank is their inability to recoup these high transaction costs through surcharges and the potential of that trend to seep back into the established card schemes.

“Merchants that accept both cards and BNPL payments are permitted to apply a surcharge to recover the cost of accepting a traditional card payment but are unable to recoup the cost of accepting a more expensive BNPL payment funded by a provider that may receive its repayments through a debit or credit card,” the RBA said in its Review of Retail Payments Regulation issues paper released on Friday.

“The Bank notes in this regard that it would take a negative view of any arrangements where a currently regulated card scheme used a BNPL structure to try to re-establish no-surcharge rules.”

The RBA has previously raised concerns with the surcharge issue, and is seeking comprehensive feedback on the pros and cons of merchants signing up to BNPL services.

“Stakeholders such as smaller businesses have observed that the cost of accepting BNPL payments – in terms of the fees paid by the merchant to the provider – is often in the range of 3–6 per cent and is generally higher than the cost of accepting other electronic payment methods.”

“The Bank is interested in stakeholder views on the no-surcharge rules of some BNPL providers. An issue for the Bank is that, unlike card schemes, BNPL providers typically have no-surcharge rules to prevent merchants from recovering the cost of acceptance from consumers via a surcharge,” it said in the issues paper.

The bank is particularly interested in hearing from merchant on the purported benefits the BNPL operators deliver to them, the costs of payments received through BNPL services compared with the cost of traditional card payments and whether merchants have any leverage to negotiate on the surcharge fees.

Afterpay said in October it was ready to work with the Reserve Bank on concerns that retailers are copping a raw deal as they sign up to the service.

Afterpay told the market that concerns around merchants not being able to recover the high fees they pay BNPL services were overwrought.

“It is our understanding that legislative and/or policy change would be required for the “buy now pay later sector to be brought under specific payment system regulation”.

Afterpay said that surcharges were a minor facet of the existing payments environment, citing RBA’s most recent survey that shows that less than 2 per cent of all payments in Australia in 2016 copped a surcharge.

Australia is one of very few OECD countries where surcharging fees are allowed, with the fees banned from retail credit and debit card transactions across all member states of the European Union including the UK. Similar bans apply in a number of states in the US.

Regulatory intervention is a significant area of concern for Afterpay, whose shares have risen 120 per cent in the last 12 months – from $14.40 to $31.65.

UBS, which has a price target of $17.60, on the Afterpay reiterated its bearish outlook on the company on Friday.

“We have previously highlighted regulatory intervention to the ‘no-surcharging’ rules applied by Afterpay as a key risk to our underlying sales forecasts and valuation.”

According to UBS analysts, a significant number of consumers using the service without full knowledge of the true costs.

“Given the significantly higher cost of providing BNPL services for merchants, if such customers were presented the true cost of using BNPL services, we believe it is likely many may choose alternate payment methods.”

“Afterpay is most exposed to this risk, in our view, given its economics relies on merchant fees.”