RBA says BNPL ‘no surcharge’ rules distort competition

By Fergus Halliday

October 22 2021
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Australia’s central bank has changed its mind about whether existing credit card surcharge rules should apply to Afterpay and Zip.

The Reserve Bank of Australia (RBA) has concluded its review of local retail payments regulation by deciding to change its tune on buy now, pay later (BNPL) operators one last time.

In a statement, the RBA said that it had “concluded that it would be in the public interest for ‘buy now, pay later’ providers to remove their no-surcharge rules, consistent with the board's longstanding position on such rules”.

In a paper covering its conclusions on Australia’s payments processing ecosystem, the central bank acknowledged past arguments that there may not be enough of a case for requiring BNPL providers to remove their no-surcharge rule, but said that allowing the exemption to continue would create an uneven playing field in the payments market.

“No-surcharge rules give BNPL providers an unfair competitive advantage over entities, such as card schemes, that are prohibited from imposing no-surcharge rules on merchants,” the RBA found.

Under the previous rules, BNPL operators were able to force merchant partners to agree not to pass the cost of the transaction onto the consumer by inflating prices accordingly. For other credit cards, this kind of arrangement is not allowed due the RBA’s existing ‘no surcharge’ rules.

Acknowledging the range of arguments for and against the change, the RBA predicted that the growing prominence of the BNPL niche was likely to force them to act sooner rather than later.

“A case for seeking the removal of no-surcharge rules could emerge before too long if these services were to continue to grow rapidly and become an even more prominent part of the retail payments landscape,” the RBA said.

The backflip on no-surcharge rules and BNPL is only the latest such turnabout from the RBA on the issue.

In 2019, the RBA issued a paper arguing for the rights of merchants to issue surcharges.

At the time, the RBA found that “if a business chooses to apply a surcharge to recover the cost of accepting more expensive payment methods, it is able to encourage customers to consider making the payment using a cheaper option”.

Back then, the bank’s argument was that by presenting customers with surcharges, merchants are able to exert pressure on the pricing policies of payment providers.

“By helping keep merchants’ costs down, the right to apply a surcharge means that businesses can offer a lower total price for goods and services to all of their customers.”

However, in December 2020, RBA governor Philip Lowe flipped on this.

“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,” he said.

As recently as May 2021, the RBA expressed little desire to intervene when it comes to the BNPL market.

Responding to the move, UBS analysts Tom Beadle and Karyn Cao agreed with the RBA’s rationale but said that the bank’s backflip from its earlier conclusions about the need for such a significant change were a surprise.

“In our view, 'no surcharge' rules have created a distortion that has significantly influenced consumers' choice of payment method, and inhibit competitive neutrality,” they said.

As for what it means for BNPL players like Afterpay, the pair acknowledged a strong risk that this development could lead to similar restrictions overseas.

“We see this as a materially negative development for Afterpay in particular given its reliance on high merchant fees to fund its economics, and incrementally negative for Zip,” they concluded.

About the author

Fergus Halliday

Fergus is a journalist for Momentum Media's nestegg and Smart Property Investment. He likes to write about money, markets, how innovation is changing the financial landscape and how younger consumers can achieve their goals in unpredictable times.

About the author

Fergus Halliday

Fergus is a journalist for Momentum Media's nestegg and Smart Property Investment. He likes to write about money, markets, how innovation is changing the financial landscape and how younger consumers can achieve their goals in unpredictable times.

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