Will the Afterpay share price suffer from greater scrutiny from regulators?

Is the Afterpay Touch Group Ltd (ASX:APT) share price going to suffer with greater scrutiny?

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Will the Afterpay Touch Group Ltd (ASX: APT) share price suffer from greater scrutiny from regulators?

An article in the The Australian certainly seems to suggest that greater scrutiny could be incoming.

The Payments Systems Board, a section of the Reserve Bank of Australia (RBA), is responsible for controlling risk in the financial system, promoting the efficiency of the payments system and promoting competition in the market for payment services, consistent with the overall stability of the financial system.

It has the powers to 'designate' a particular payment system as being subject to its regulation, determine rules for participation in that system whilst working with the ACCC, and set standards for safety and efficiency for that system which may deal with issues such as technical requirements, procedures, performance benchmarks and pricing.

As you can see, this Board has powers that could affect Afterpay.

Afterpay has a no surcharge policy, meaning that retailers cannot simply directly charge customers for the cost of the merchant fees paid to Afterpay, which is a material percentage fee of the sale.

However, the no surcharge rules were ended in 2003 for credit card companies because the RBA intervened to reduce cross subsidies that it thought distorted the payments system after credit cards became a 'must have' for most consumers, and it ruled merchants should be able to recover costs rather than increasing prices across the board.

The Australian article states that "It is understood Afterpay avoids the "no surcharge" rule applied to credit cards because it is not defined as a credit provider."

The growth of Afterpay, and the entire buy now pay later segment including Zip Co Ltd (ASX: Z1P), makes it somewhat seem that these instalment services are becoming a 'must have' service for many consumers, which is why it is now getting the attention of the Payments Systems Board.

Foolish takeaway

With so much economic value and expenditure being funnelled through Afterpay and others whilst creating a liability until the payment is complete, it would make sense why the appropriate regulators are considering what should or should not be done.

Afterpay has a lot of growth potential, but there is far too much risk of competition, regulation and merchant fees reducing that could hurt Afterpay's growth outlook at the current high share price.

Tristan Harrison has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. owns shares of ZIPCOLTD FPO. The Motley Fool Australia owns shares of AFTERPAY T FPO. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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