Afterpay surcharge unlikely, says RBA
The Reserve Bank says it is unlikely to recommend changes to rules that prevent retailers from surcharging customers who use buy now, pay later schemes such as Afterpay and Zip as it helps promote innovation in the sector.
RBA governor Philip Lowe, addressing the Australian Payments Network on Monday, said the board's longstanding view is that the rights of merchants to apply a surcharge promotes competition in the payments system and downward pressure on costs, but acknowledged it is possible that no-surcharge rules can help the development of new payment methods.
Reserve Bank of Australia governor Philip Lowe says the current rules on surcharging could help payment innovation. Credit:AFR
"The board's preliminary view is that the BNPL 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," he said.
"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 BNPL operators should be required to remove their no-surcharge rules right now."
He added that even the largest buy now, pay later players still account for a small proportion of total consumer payments notwithstanding the fact that the sector is growing rapidly. The increasing array of BNPL providers is another factor to take into consideration with the competitive pressure potentially putting downward pressure on merchant costs, Dr Lowe said.
The RBA flagged that a public policy case for the removal of the no-surcharge rules is “likely to emerge” over time in regard to some BNPL arrangements but indicated it is expected to rely on voluntary agreements with BNPL vendors rather than a legislative solution.
"As part of the bank'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.
Afterpay chief executive Anthony Eisen welcomed the news. “It’s encouraging to see such clear recognition of the benefits that innovation and greater competition deliver for businesses and for customers,” he said.
“New models and platforms, based on mutually-beneficial outcomes, have a central role to play in the evolution of Australia’s retail and payments sector.
Afterpay shares plunged in October last year when the RBA review was announced, but the company defended its service at the time as offering value to merchants that goes "far beyond" the payment processing aspects of a transaction.
“At the core of our business is the Afterpay platform, which delivers millions of referrals to our merchant partners every month,” Mr Eisen said.
A report from Jarden Securities put a $124 price target on Afterpay, citing its appeal as a low-cost marketing platform.
“We expect Afterpay to gain an increased share of total payments given its strong value proposition to customers and merchants which extends beyond purely being a payment provider,” Jarden said.
Zip co-founder and chief operations officer Peter Gray also backed Dr Lowe’s stance.
“We agree with the RBA governor that it's important not to stifle innovation in a young sector with lots of providers competing hard to provide customers and merchants [with] a better deal. BNPL is not like scheme cards - there is no interest and we provide merchants [with] lots of added services, such as marketing and customer referrals, customer insights and fraud and chargeback protection. We innovate and do things differently."
Afterpay shares, which dropped below $30 after the review announcement, were trading 1.6 per cent higher at $96 in early afternoon trading.
Afterpay's business model is based on its service being free to customers and charging retailers a fee for the service.
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Colin Kruger is a business reporter. He joined the Sydney Morning Herald in 1999 as its technology editor. Other roles have included the Herald's deputy business editor and online business editor.