Controversial no-surcharge rule for BNPL players is here to stay — for now

RBA governor Dr Philip Lowe. Source: AAP.

Controversial ‘no-surcharge’ rules for buy-now-pay-later (BNPL) players are “unlikely” to be scrapped — at least for now — Reserve Bank of Australia governor Dr Philip Lowe has suggested.

At an address at the Australian Payments Network annual summit, Lowe gave the strongest indication yet that retailers offering BNPL payment options will still not be allowed to pass on the associated costs to their customers.

Currently, BNPL players are permitted to issue a ‘no surcharge’ rule to merchants, prohibiting them from passing on the burden of fees.

It’s a controversial practice and has drawn criticism from small business owners. But, in January 2020, a suite of self-regulation measures published by the BNPL sector failed to address the issue.

In his speech, Lowe said the payment system board’s longstanding view is that, ultimately, giving merchants the right to issue a surcharge will promote competition and help keep costs down for retailers.

“This is especially so when merchants consider that it is near essential to take a particular payment method for them to be competitive.”

However, he also said having a no-surcharge rule in place promotes innovation, and the development of new payment methods.

At some point, the costs of a no-surcharge rule will outweigh the innovation benefits, Lowe explained.

BNPL operators in Australia “have not yet reached that point”, he said.

“Consistent with its philosophy of only regulating when it is clear that doing so is in the public interest, the board is unlikely to conclude that the BNPL operators should be required to remove their no-surcharge rules right now.”

This is a space that’s still maturing. Currently, even the biggest BNPL players account for a small amount of the total proportion of consumer payments, he said.

And, the increasing number of new players will likely drive down costs for merchants organically, as competition mounts.

However, while scrapping no-surcharge rules isn’t on the cards right now, it likely will be in the not-too-distant future.

Many operators are growing fast, and becoming almost universally adopted in certain sectors. It’s not a case of if, Lowe hinted, but a case of when.

“Bank staff will be discussing with industry participants possible criteria or thresholds for determining when no-surcharge rules should no longer be allowed,” he said.

What’s all the buzz about?

Payments technology has become one of the standout winning sectors during the COVID-19 crisis, and has subsequently dominated business press headlines throughout.

In his speech, Lowe acknowledged that payments have become a space of excitement.

“It brings together two things that people have a fascination with: money and technology.”

The landscape is changing fast, and new players — including fintech startups and big tech companies alike — are entering the market.

But, while Lowe broadly supports innovation, he noted that it comes with regulatory challenges.

Nowhere is this more true, or more contentious, than in the booming buy-now-pay-later sector.

Over the past year, the COVID-19 pandemic has led to an increase in e-commerce activity, which has, in turn, led to an increase in the use of BNPL products.

That’s meant market leaders such as Afterpay and Zip have seen their share prices soar to historic highs, while a slew of new entrants have entered the market.

But, it’s also raised questions about whether such platforms are good for the consumers in terms of their financial wellbeing, or in the best interests of retailers.

Swedish BNPL provider Klarna, which allows users to pay using its platform at any store, entered the Aussie market for online retail earlier this year, and in-store just weeks ago.

But, the grand launch on the ground in a Sydney Westfield centre came amid a war of words between founder Sebastian Siemiatkowski and Afterpay’s Anthony Eisen.

Siemiatkowski took aim at Afterpay’s 4% merchant fees, which account for about 80% of the fintech’s revenues.

“That’s not a payments scheme any more, that’s an extortion scheme,” he reportedly said, calling for a cap on merchant fees across the board.

Klarna’s country head for Australia and New Zealand Fran Ereira later told SmartCompany she was surprised at the high BNPL fees in Australia, saying they’re “a burden” on the retail sector — one that’s crucial to economic recovery.

Eisen responded by calling Siemiatkowski’s claims hypocritical. Klarna charges merchants $0.30, plus 5.49%.

“They are not out of kilter with us,” Eisen reportedly said.

“And even if they were — why are more merchants choosing us then in the US and Australia?”


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