The buy now, pay later sector has been given a stay of execution in its fight to stop merchants passing on the costs of the service to consumers with an ongoing review by the Reserve Bank of Australia (RBA) concluding the sector has not yet reached a tipping point in favour of introducing the change.
While BNPLs are experiencing dramatic growth in the battle for market share against credit cards, RBA governor Philip Lowe said today in a speech addressing regulation in the payments sector that “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”.
Lowe said that while the Board’s view is that allowing merchants to pass on surcharge costs promotes competition and puts downward pressure on costs for business, the Board is unlikely to conclude that BNPL operators should be forced to remove their no-surcharge rules right now.
The RBA’s coronavirus-delayed review into regulation on the sector is not due until 2021, but the governor’s speech today is a green light for the sector to continue using its current business model, which block retailers from passing on costs they are charged by BNPL services – believed to be between 3% and 7% – to customers.
Lowe said the RBA recognised that no-surcharge rules can play a role in the development of new payment methods and make it easier to build up a network and thereby promote innovation and entry.
“Even the largest BNPL providers still account for a small proportion of total consumer payments in Australia, notwithstanding their rapid growth,” he said.
“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. In addition, the increasing array of BNPL providers is resulting in competitive pressure that could put downward pressure on merchant costs.”
His announcement is a major win for the likes of Afterpay and Zip, who sell their products on the basis of it not costing users anything – unless they miss a payment, which accounts for 20% of Afterpay’s revenue – while merchants are able to add a payments surcharge for credit and debit card use to cover those costs.
Corporate regulator ASIC has also been looking into the BNPL sector but has declined to intervene.
Lowe said that the RBA expects the case to remove no-surcharge rules for some BNPLs will emerge over time, and when it does, the central bank’s preference is for voluntary agreements with the providers.
“Some of the BNPL operators are growing rapidly and becoming widely adopted by merchants, particularly in certain sectors. 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.
Big tech changing finance
Governor Lowe’s address also looked at the role big tech played in driving change and innovation in payments, pointing to China, where Ant Group (Alipay) and Tencent (WeChat Pay) have transformed retail payments.
In Australia, he said Apple Pay and Google Pay wallets illustrate “some of the new and complex issues that are arising”.
“These wallets are a good innovation. At the same time, though, they are raising new competition issues,” Lowe said, pointing to Apple’s restrictions on the use of near-field communication (NFC) technology on its devices.
“Many argue that this restriction limits the ability of other wallet providers to compete on these devices and that this could increase costs. This issue has recently attracted the attention of policymakers in several countries,” he said, adding that the RBA is watching developments in Europe and elsewhere closely.
Lowe also raised the issue of the value of information and data in wallets and the different approaches of Google and Apple. Google Pay uses the data, but doesn’t charge transaction fees to issuers, while Apple takes the opposite approach.
“It is certainly possible that these different approaches to the use of data on the one hand and access and fees on the other are linked. So there are issues to consider here too,” he said.
“Data analysis is part of their DNA and they have become increasingly effective at commercialising the value of data they collect and analyse. Providing additional services, such as payments, also reduces the need for users to ‘leave’ the platform. So there are complex issues to be worked through here. One of these is the terms of access to the platform and whether the platform requires that payments be processed by the platform’s own payment system.”
Lowe also mentioned Facebook’s cryptocurrency plan Diem (formerly Libra).
“This initiative has raised concerns from governments and regulators in many jurisdictions regarding a wide range of issues including consumer protection, financial stability, money laundering and privacy,” he said.
“If Diem poses bank-like risks it will be subject to bank-like regulatory requirements. It remains to be seen how this and other similar initiatives progress.”
You can read Lowe’s full speech here.