Finance

“Over a barrel”: Should Afterpay’s ‘no-surcharge’ rule for merchants be axed?

Matthew Elmas /

Should merchants using buy-now-pay-later (BNPL) services such as Afterpay be allowed to levy a surcharge to recoup their fees?

That’s the question being asked by the Reserve Bank of Australia (RBA), which is casting its eye over whether ‘no-surcharge’ rules enforced on merchants by BNPL platforms should be banned.

Publishing a payments regulation issues paper last Friday, Australia’s central bank indicated it favours allowing merchants to apply surcharges on BNPL transactions, saying small businesses are paying much more to process those sales relative to other payment methods such as cards.

Buy-now-pay-later services such as Afterpay, Zip and Openpay have exploded in popularity around the world in recent years. In Australia, consumers owe over $900 million to such providers.

But many of the platforms, including Afterpay, don’t charge customers for using their services if they pay on time, which means most of their revenue comes from merchant fees.

Controversial ‘no-surcharge’ rules are also often enforced, preventing merchants from overtly passing on those costs to customers, and creating a curious situation where a retailer can levy a surcharge on card payments, but not for often-more-expensive BNPL transactions. 

The RBA said small businesses are paying between 3-6% per transaction for utilising BNPL services, which is “generally higher” than other electronic payment methods such as cards.

Nathan Huppatz, founder of costumes.com.au and an early adopter of BNPL, says merchants feel like they’re “over a barrel” — squeezed between high fees and a feeling they must use the popular services.

“I don’t really see why a BNPL provider should be able to force a retailer to wear the whole cost,” Huppatz tells SmartCompany

“The demand for BNPL is high, but the fees hurt, and due to BNPL agreements, they can’t pass fees on,” Huppatz says.

Estimates for 2018-19 indicate the value of BNPL payments has hit the $6 billion mark in Australia, up from just over $3 billion in 2017-18. Afterpay, the biggest player in Australia, makes about 80% of its revenue from merchants.

Approached for comment, Afterpay directed SmartCompany to its October ASX release, which served as a response to the RBA’s initial disclosure that it would be investigating merchant surcharges.

The platform has argued its “value to merchants” extends “far beyond” payment processing, characterising its business as a valuable referral channel for independent retailers.

But those SmartCompany has spoken with in recent weeks say while BNPL services have served as a valuable channel for incremental sales growth, the platforms have become much more competitive in recent months as more businesses have signed up to major platforms.

This combination of transaction-based merchant fees, platform-based consumer demand and standard agreements limiting the autonomy of small business owners is nothing new.

Restaurants dealing with high fees for using UberEats and independent motel owners contending with price parity arrangements imposed by online travel agencies have been dealing with similar problems in their own industries.

In relation to BNPL, the RBA said its view is that surcharges play an “important role” in signalling costs to consumers.

“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. 

“The possibility that a consumer may choose to pay with a lower-cost option when presented with a surcharge also helps put competitive pressure on the pricing policies of payment providers, indirectly lowering merchants’ payments costs. 

“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,” the bank said.

Do you think buy-now-pay-later companies should be able to prevent merchants from passing on their fees? Let us know: [email protected]

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Matthew Elmas

Matthew is the news editor at SmartCompany. You can contact him at [email protected].