Reserve Bank calls for BNPL reform

The Reserve Bank of Australia (RBA) published findings from its Review of Retail Payments Regulation on Friday (22 October), which among other matters, considered the buy now, pay later (BNPL) sector.

The review had looked into whether businesses that accept payments via BNPL services should be allowed to also apply a surcharge to recover the cost of accepting the transaction.

BNPL services typically are free or inexpensive for consumers, but tend to be expensive for merchants to accept, the RBA said.

Despite this, BNPL providers typically have “no-surcharge” clauses written into their contracts, which block merchants from passing on the costs to the consumers who benefit from using the service.

The central bank has now argued there is a public interest case for BNPL providers to remove their no-surcharge rules, flagging that it will engage with Treasury on regulatory approaches.

The RBA payments board had considered that the no-surcharge rule could promote innovation and competition in the payments system, by helping new providers build up the consumer base of their networks.

However, designated card schemes and some other payment services have been required to remove their no-surcharge rules – raising concerns for the Reserve Bank around competition in the payments provider sector.

While many merchants choose not to surcharge card payments, the RBA affirmed that having the choice to do so could help lower their payment costs and promote competition between card schemes.

The average BNPL merchant fee was found to be around 4 per cent of the transaction in the June quarter, but some stakeholders had informed the RBA that the cost could skew higher for individual merchants, particularly smaller businesses and that there is considerable variation across providers.

BNPL transactions were estimated to have grown by around 25 per cent over the year to June, with providers processing around 67 million transactions, worth a total of $11.5 billion.

The RBA stated data from a smaller number of listed providers indicate the value of BNPL transactions had almost quadrupled over the last three years.

The segment still accounts for a relatively small share of the payments market in Australia, with the value of BNPL payments in the 2021 financial year being equivalent to 1.7 per cent of Australian card purchases and 3.1 per cent of total retail purchases.

But the RBA had received feedback that the market share of providers is much higher for online transactions, particularly in certain retail segments. The Reserve Bank had estimated that BNPL accounted for around 20 per cent of the value of online retail transactions.

“…There was strong feedback from merchants that BNPL has become an essential payment offering for many of them and that the high cost of these services was pushing up their payment costs,” the RBA’s report stated.

“The ability to surcharge can be particularly important for promoting competition between payment services where merchants consider it essential to accept a particular payment method to remain competitive.”

It was also observed that competition could take some time to have a meaningful impact on BNPL merchant fees.

As such, the board concluded that “it would be in the public interest and consistent with its mandate to promote competition and efficiency in the Australian payments system for BNPL providers to remove their no-surcharge rules”.

The Reserve Bank stated that it will engage with Treasury as part of the Treasury review, with an aim to have a level playing field around no-surcharge rules and to apply downward pressure to merchant payment costs, particularly for small businesses.

BNPL has steadily been embraced by more and more lenders in Australia.

ANZ recently bit the bullet, teaming up with Visa to roll out its own rendition.

Similar to Visa, Mastercard launched new infrastructure allowing banks and lenders to offer BNPL products across its network.

Citi flagged that it would launch offering Spot. in October, while Suncorp also declared that it would be releasing a Visa-backed offering named PayLater.

CBA in August launched its BNPL product StepPay, while Westpac’s Kiwi arm confirmed it had entered into a joint venture agreement with provider humm group in July to roll out BNPL offering bundll to the New Zealand market.

The launches have come about as BNPL giant Afterpay was sold to US payments company Square for $39 billion.

A NAB report in June showed BNPL became the fourth-most common debt held by Australians over the March quarter, retained by around 18 per cent of consumers.

However, an ASIC report in November last year found 22 per cent of BNPL customers prioritised their buy now, pay later debt over loan repayments or bills.

[Related: Senate committee pushes for accountability in debanking]