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The Reserve Bank of Australia (RBA) is taking a keen interest in the growing use of Buy Now Pay It Later (BNPL) services following AfterPay’s dismissal of any suggestion merchants are increasing prices to mitigate the cost of using its services.

Following the release of the Review of Retail Payments Regulation Issues Paper on Friday, the RBA is seeking input from merchants, and stakeholders surrounding the use and benefit of BNPL services over concerns costs are being passed onto consumers in the form of higher prices.

Most BNPL services, which allow customers to purchase goods or services while delaying payment via a low or zero interest instalment scheme to the provider, are offered to the consumer for ‘free’ if payments are made on time.

Unfortunately for the merchant, a per-transaction fee is applied when accepting payment through the BNPL service to cover the credit risk.

It comes after AfterPay chief executive Anthony Eisen rejected suggestions retailers were increasing the prices of goods to mitigate the cost of its services, justifying their costs over claims the service is a lead generation tool rather than just a payments option.

According to Mr Eisen when speaking to The Australian Financial Review, the cost of using the BNPL service is smaller compared to other methods.

‘Much more of Afterpay’s service would be classified as marketing and promotion than mere transaction processing.’

‘Our fee is relatively small compared to other methods [of marketing], for example, affiliate marketing where the cost of leads is 8% to 12% in some instances.’

BNPL operators place a fee of 3 to 6% on merchants for its service, but state clearly that retailers are unable to pass these cost onto consumers under the ‘no surcharge’ rule set out by the RBA.

However, the No Surcharge rule may be on its way out with the RBA suggesting its removal for merchants using BNPL services on the basis that it was leading to price increases.

Though if implemented, it would not be mandatory for merchants to pass on costs.

Since 1996-97 following the Wallis Inquiry, the RBA has periodically reviewed the banking Payments System Board to control risk in the financial system, promote efficiency and competition.

The most recent review revealed that less than 2% of all payments in Australia came with a surcharge fee.

In 2018-2019, 10 billion debit and credit card payments totalled $678 billion in 2018-2019 alone with only $4.3 billion worth of merchant fees being paid.

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‘The [RBA] has long been of the view that the right to apply a surcharge on more expensive payment methods plays an important role in signalling the costs of different ways of making payments to consumers’.

The RBA wants to hear from retailers and other stakeholders around the benefits that the BNPL service provides, asking merchants, ‘how do the costs of payments received through BNPL services compare with the cost of traditional card payments?’

According to UBS analyst Tom Beadle, ‘if such customers were presented the true cost of using BNPL [Buy Now, Pay Later] services, we believe it is likely many may choose alternate payment methods’.

UBS believes the ‘no surcharge’ rule applied by AfterPay represents a key risk to its underlying sales forecasts and valuations, concerned that business would lose customers if they were presented with the ‘true cost’ of using the buy now, pay later services.

With submissions closing on 31 January next year, the RBA will very soon reveal the ‘true cost’ of BNPL services in Australia, asking stakeholders these five questions:

  1. How do merchants and other stakeholders view the benefits and services that BNPL models
    provide?
  2. How do the costs of payments received through BNPL services compare with the cost of
    traditional card payments?
  3. Has the recent entry of additional BNPL providers influenced merchant fees for BNPL services?
  4. Do all BNPL providers have binding no-surcharge rules or are merchants able to negotiate on
    these?
  5. Are some BNPL services viewed as ‘must take’ payment methods for particular market segments
    or transaction types; that is, do merchants feel that they cannot refuse to accept BNPL for fear of
    losing business?

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