As outlined in the Review of Retail Payments Regulation Conclusions released earlier this week, the Reserve Bank of Australia (RBA) has backflipped on its buy now pay later (BNPL) sector stance. New regulations would see retailers become able to pass on BNPL costs to customers.
The board stated it “would be in the public interest” for BNPL platforms to remove their no-surcharge rules. The board concluded the RBA would work alongside the Treasury on regulatory measures to implement the change.
This decision represents a change of mind from the RBA, which in December of 2020 supported BNPL platforms in upholding the no-surcharge rule that retailers are bound to. The rules currently restrict the ability of merchants in passing on the costs of providing these BNPL services to customers.
Last year, RBA governor Dr Philip Lowe said the rules are “unlikely” to be scrapped, stating they promote competition and help keep costs down. BNPL services such as AfterPay and Zip use a zero-cost to customer business model, instead charging retailers between three and six per cent fee to use the platform.
Dr Lowe said last year, “The board’s preliminary view is that the buy now, pay later 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,
“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 buy now, pay later operators should be required to remove their no-surcharge rules right now.”
Based on the recommendation, BNPL providers would be subject to similar regulations applied to debit and credit card providers who cannot prevent retailers from passing fee costs to their customers.
The BNPL sector published a draft of self-regulating minimum standards in early 2020. The standards, which were finalised in March of 2021 include, a cap on late fees for customers and a promise to refrain from targeting the financially vulnerable.
The code was drafted by the sector heavyweights, including AfterPay, Zip, Brighte, flexigroup, Openpay and Payright. The code comes after drawing criticism from the likes of financial regulator ASIC and the RBA itself. The code of conduct was hailed as a world-first for BNPL providers.
However, missed in these standards were the margin destroying no-surcharge rules, which are particularly impactful on small and medium businesses with already thin margins. With this in mind, the RBA cast its eye to investigate the fee’s impact on small businesses.
Impact on SMEs
Small businesses across Australia have used BNPL options to attract new customers and broaden the buying power of their existing customers. As BNPL services grew in popularity and became an expected payment option amongst younger shoppers, they were bound to attract regulatory scrutiny.
The RBA has now made the call that the balance has tipped too far in favour of BNPL platforms, and regulation is necessary to protect businesses.
Dr Lowe said in 2020, “If the point is reached where the board’s view is that the public interest would be served by the removal of a no-surcharge rule, the board’s preference would be to reach a voluntary agreement with the relevant provider.”
Research conducted by UBS estimated that Afterpay and Zip’s retailer fees could climb as high as 7 per cent as BNLP platforms grow their power within the market.
After two years of lockdown, increased international shipping costs, and increased cost of raw materials, amongst other issues, businesses big and small are seeing their profit margins being eaten away. Regulation targeting BNPL no-surcharge rules could help protect the profits of SMEs.
On the other hand, changing these rules may result in consumers being driven away from BNPL options to avoid incurring surcharges. This shift would see Australian consumers lose the significant buying power of BNPL platforms, resulting in businesses losing out on potential profits.
However, UBS research showed customers were generally not aware of the BNPL business model that charges merchants. The research showed that 45 per cent of users said they would not use buy now, pay later at small businesses, and 33 per cent at large companies once made aware.
This paradoxical situation would see small businesses simultaneously benefit from regulatory protection while risking the loss of the increased spending BNPL options provide.