Afterpay shaken as RBA reviews bans on merchant surcharges

The Reserve Bank will consider intervening in rules that stop retailers from surcharging customers who use buy now, pay later schemes, sparking fresh warnings about the risks to Afterpay's business model and sending its shares tumbling.

As the buy now, pay later (BNPL) sector grows in popularity, the central bank has given its most explicit signal yet that it could take "policy action" over the cost to merchants of accepting such payments.

Stopping retailers from passing on the cost of Afterpay to customers is a key part of its business model, some analysts said.Credit: Dominic Lorrimer

In the annual report of its Payments System Board, the RBA this week said a review next year would look at "no surcharge" rules imposed by BNPL operators.

These prevent retailers from charging customers a surcharge for paying in this way, in contrast to credit cards, where retailers are allowed to add a surcharge to cover their extra payment costs.

"BNPL services are relatively expensive for merchants to accept and they usually restrict the ability of merchants to apply a surcharge to pass on these costs to the customers that directly benefit from the service," the RBA said.

"Accordingly, an issue for the bank is whether policy action in relation to these no-surcharge rules should be considered."

Afterpay charges retailers a fee of between 3 per cent and 7 per cent, according to analysts, but customers do not pay a fee for using the service if they pay on time.

With markets already nervous over the risks to Afterpay from regulation, its shares dropped 7.3 per cent to $29.65 on Friday, while Zip Co shares fell 6.2 per cent to $4.35.

Morningstar analyst Chanaka Gunasekera said that 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 Mr Gunasekera, who believes Afterpay is overvalued.

Afterpay declined to comment.

Earlier this week UBS analysts sparked a plunge in Afterpay's price by highlighting regulatory risk, saying that if consumers saw the full price of Afterpay it would cause "risks to growth.

Chief executive of the Consumer Action Law Centre (CALC), Gerard Brody, said he would support the removal of "no surcharge" rules, arguing these allow BNPL schemes to hide the cost of credit from customers.

"I think it becomes really significant if they remove the ability from the BNPL schemes to have a 'no surcharge' rule. If a retailer had to disclose a cost of service, it's effectively having to disclose a cost of credit," Mr Brody said.

CALC has argued for tighter regulation of Afterpay, which is not classified as credit because it does not charge interest.

The RBA has previously intervened in the credit card and debit card market to allow merchants to impose surcharges for these types of electronic payments.

The central bank cited a sharp increase in payments processed in BNPL providers in Australia, to about $6 billion last financial year, from slightly more than $3 billion a year earlier.

The RBA said merchants typically paid 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.

"This 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.

Its review is likely to consider if the rise of BNPL schemes has made these services essential for retailers.

It is possible that even if retailers were allowed to surcharge for Afterpay, some may choose not to do so because the service was bringing in revenue they would not otherwise have made.

As part of its regulation of payments, the RBA is keen to ensure consumers have the incentive to use cheaper payment methods.