Afterpay Ltd (ASX: APT) has argued against enhanced regulation of the buy-now, pay-later (BNPL) sector, telling the Reserve Bank of Australia (RBA) it is not a payments system.
The RBA is currently conducting a review of payments regulation, which includes considering the impact of no-surcharge rules imposed on merchants by BNPL providers like Afterpay, Splitit Ltd (ASX: SPT), and Zip Co Ltd (ASX: Z1P). The RBA flagged in October that it would examine whether policy action in relation to no-surcharge rules should be considered.
Afterpay: more than a payment service
According to Afterpay, the imposition of regulation would reduce competition and consumer choice, and curb innovation. Afterpay has argued that it is a customer acquisition channel for retailers, connecting them with millennial customers that are difficult to reach. Its merchant fees should therefore be compared to the costs charged by Google and Amazon for referrals, which can be as high as 10%.
For BNPL providers' no-surcharge rules to remain, they will need to convince the RBA they are offering more than a payments service. Afterpay has argued it provides inbound business and incremental sales to retailers in addition to providing a payments service. It claims that the benefits to retailers of offering BNPL include increased orders and customers and higher order values. Credit card companies unsuccessfully tried a similar argument in the late 1990s, with the RBA allowing merchants to levy surcharges on card payments in 2001. Afterpay, however, says that on a net basis retailers gain more from Afterpay than what they pay to Afterpay.
Retail and consumer groups urge RBA action
Retailers and consumer groups have urged the RBA to force BNPL providers to stop preventing retailers from passing on the costs of their services to customers. Afterpay charges retailers a $0.30 transaction fee and a commission ranging from 3% to 7% of the value of sales. BNPL providers' agreements prevent retailers from passing these costs onto customers. By contrast, credit and debit card issuers are prohibited by law from stopping merchants passing on the costs of the services to consumers, which for credit cards range from around 0.6% to 1.5%.
According to the submission by CHOICE, the Consumer Action Law Centre, Financial Counselling Australia and the Financial Rights Legal Centre, BNPL offerings effectively drive consumers away from lower cost payment options. Their submission posits that Afterpay and its ilk have "skewed the market by hiding the true cost of using these kinds of services." The result, they argued, was that all customers paid more where BNPL services were available as retailers were forced to increase prices to cover the cost of the services.
Consumers shielded from true cost
The no-surcharge rule means consumers are shielded from the true cost of utilising BNPL payment methods. If retailers were allowed to levy a surcharge, customer behaviour would likely adjust accordingly. When presented with the true cost of using BNPL services, many customers would likely choose alternate payment methods leading to less use of BNPL services.
The consumer groups urged the RBA to "level the playing field" by allowing retailers to pass on the costs of using BNPL services to consumers via surcharges. According to the Australian Retailers Association (ARA), this would allow retailers to steer consumers to lower cost payment options. Ultimately, the ARA believes that few retailers would actually impose a surcharge on BNPL transactions as this would negatively impact the customer experience. Nonetheless, if retailers had the ability to do so it would assist them in negotiating lower fees from BNPL providers.
Foolish takeaway
Afterpay shares have continued their climb this year, increasing more than 27% since the start of January. Increased regulation of the BNPL sector could, however, put the brakes on future shares price increases, not just for Afterpay, but for other BNPL providers as well.
