Should shareholders in buy now, pay later operators such as Afterpay characterise the Reserve Bank’s favourable decision on the sector as a reprieve or a case of good news now, bad news later?
The good news is that the RBA has taken the view that merchants (like retailers) cannot pass on their fee (or surcharge) to customers for using buy now, pay later (BNPL) services.
The bad news is that the RBA didn’t rule out the prospect of reversing this decision somewhere down the track. It is the BNPL industry’s Sword of Damocles hanging over its head.
In the meantime the RBA’s update on the payment system makes it clear that BNPLs have for now chalked up something of a win – the status quo prevails. This is not a perfect outcome for the sector but realistically the RBA couldn’t make long-dated promises about future regulation.
BNPL players don’t want a 4 to 6 per cent charge added to the price of goods and services just because the consumer chooses to pay using this instalment payment method. It would tilt the playing field towards consumer credit/debit cards.
In landing its decision to leave BNPL rules as they are for now, the Reserve Bank applied two ingredients to its thinking. The first was its application of the greater good. It reasoned the harm no-surcharge may inflict on merchants is not enough to offset the positive effects that BNPL innovation has brought to financial services.
While BNPL is still in its relative infancy as a fintech disruption agent, the RBA doesn’t want to impede technological progress. Plenty of the merchants (particularly smaller businesses) wouldn’t agree. They feel they are caught in a bind of having to offer the BNPL because of its popularity with consumers and that they would be at a disadvantage against competitor merchants if it wasn’t available.
Their concerns are understandable but in theory at least the BNPL facility should be delivering sales they wouldn’t otherwise have got.
Despite lobbying pressure from some sections of retail there is recognition among many that BNPL has helped more than it has hurt.
Credit Suisse released a survey on Monday of 80 SME merchants across the US and Australia – of which about 95 per cent saw BNPL as a “must-have” for their business. Afterpay was viewed as the most crucial BNPL offering with 89 per cent saying it was a “must-have”. More telling was the finding that 95 per cent of merchants believed their BNPL service was offering good value because it generated increased basket size, attracted new customers and improved customer satisfaction.
Thus BNPL could (and probably should) be characterised as any other service, or cost of doing business, that the merchant pays for like, for example, marketing and advertising costs.
The Reserve Bank’s second stated reason for giving BNPL a regulatory reprieve (for now) is that the fees they charge merchants should fall over time as new instalment players enter the market and the BNPL fees get competed away.
But if the past few years of Afterpay’s revenue explosion is any guide, there is not yet any real sign that merchant fees are falling despite the burgeoning growth in the number of BNPLs in the sector.
They appear to be popping up like mushrooms – some like Afterpay and Zip are well established but there are plenty of others such as Klarna, Flexigroup, Latitude, Openpay, Payright, Sezzle, Splitit, Layby and Limepay. And this is not an exhaustive list.
Many offer different flavours of BNPL – variations on the traditional approach used by Afterpay. Some target only big ticket items, others only certain types of goods and services, while some could best be described as payment hybrids that offer options including the use of credit cards to make instalments.
Afterpay is a clear leader and has sufficient critical mass in the Australian market to render it virtually unassailable. This probably explains why its fees have remained resilient.
But even after the industry’s meteoric rise in Australia, the RBA has decided the sector is not yet large enough to justify its imposition of game-changing regulation. The central bank says it remains only a small proportion of total consumer payments in Australia.
But here is the RBA’s kicker – “the board expects that over time a public policy case is likely to emerge for the removal of the no-surcharge rules in at least some BNPL arrangements. 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.”
The RBA appears to be suggesting if the no surcharge rules were to change, it would be hoping to negotiate with BNPL players individually, and on a voluntary basis.
Credit Suisse, which is bullish on Afterpay and has a target price on the stock of $124 (against the current share price of just under $96) downplays the regulatory risk for Afterpay on the basis that merchants might be disinclined to impose a surcharge and lose Afterpay and the customers that use it.
Such an outcome would fall into the bailiwick of the Australian Competition and Consumer Commission rather than the RBA.
Start the day with major stories, exclusive coverage and expert opinion from our leading business journalists delivered to your inbox. Sign up here.
Source: Thanks smh.com