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Global tech-driven modern payment services company, Afterpay Limited (ASX: APT) has put forth an argument in its submission to the Reserve Bank of Australia (RBA), that Buy Now, Pay Later (BNPL) companies should be given the liberty to prevent retailers from passing on its fees to customers.
The company believes that BNPL is a growing and innovative sector that deserves to be self-regulated. There is no need for regulation of the fees, and Afterpay should not be considered as a payment system due to its small size, unique characteristics and value proposition to merchants and consumers. The company claims to be competing with the likes of global giants, Google and Facebook in generating leads for merchants at a much lower cost.
Regulations to Curtail Innovation?
With a fear of having its business model and revenue harmed, Afterpay has warned RBA that if retailers enforce surcharges, it would restrain innovation.
Afterpay Chief Executive Anthony Eisen has claimed in several interviews that its BNPL service is much more than just a payment option. It is also a channel to the hardest-to-reach consumer in the world, which is Millennials and Gen Z.
A level playing field
As per the regulatory bodies, BNPL providers are thriving in a regulatory black hole. As merchants are not allowed to add a surcharge to customers on the purchase price, it is causing a distortion in the market. As per market participants, not all merchants want to surcharge but the ability to do so will empower them to negotiate with the providers to reduce the fees.
For instance, Afterpay charges a fixed transaction fee of 30 cents plus a commission on the sales value ranging from 3% - 7%, reflecting a much higher cost than that of accepting payments from credit cards, which range from 0.6 % for large merchants to 1.5 % for smaller ones.
Moreover, Credit and Debit card companies are not allowed to stop their merchants from passing on the costs of the services to customers, which gives an undue advantage to Afterpay to market itself as being free to all customers who pay on time.
Regulators Rolling their Sleeves Up
The RBA did give an explicit cue last year that it could intervene and possibly take "policy action" over the cost to merchants from BNPL schemes, and some of the key consumer bodies have backed this consideration. In the annual report of its Payments System Board released in October 2019, the RBA had mentioned of a review to be taken up in 2020 examining the "no surcharge" rules imposed by BNPL operators.
Subsequently in December 2019, the Australian Financial Industry Association (AFIA), the leading industry voice of a diverse Australian finance sector with more than 100 financiers as members, announced that the rapidly expanding BNPL market would begin public consultation in mid-January 2020, aiming for implementation of a Code of Practice for BNPL providers (BNPL Code) by 1 July 2020.
Often referred to as the ‘modern day lay-by’, a research had estimated that ~ 30% of adults (around 5.8 million) in Australia use BNPL services for predominantly making small retail purchases and payments. The research also indicate that the younger lot of these customers purposefully use BNPL services to manage their finances.
AFIA and its BNPL members including Zip Co, Brighte, Afterpay, flexigroup, Latitude, OpenPay and Payright made defensive remarks to ASIC’s Report 600 and the Senate Economics Reference Committee, that had recommended formulation of a Code of Practice for the BNPL market.
Thus, the whole BNPL industry is exposed to a new regulatory risk.
Regulators’ Checklist to BNPL Companies
It was announced that the code’s key obligation for BNPL companies would be the following-
- Assess customers to ensure the product would be suitable to them before providing it, as well as provide additional controls for customers identified as potentially more vulnerable through this assessment process;
- Ensure customers access to internal complaints handling, so complaints would be resolved quickly and fairly, and if they cannot be resolved, can be forwarded to AFCA;
- Provide hardship assistance to customers that experience financial difficulties;
- Disclose a summary of key product features to improve customers’ understanding of the product and ensure customers are properly informed about the products’ terms and conditions;
- Ensure vendors and merchants act consistently within BNPL provider guidelines.
Stock Information: Afterpay Limited has a market capitalisation of around A$ 10.44 billion with ~ 264.6 million shares outstanding. On 10 February 2020, the APT stock settled the day’s trade at A$ 38.685. Also, APT has delivered impressive positive returns of 75.44% in the last six months, 28.76% Year-to-date and 50.30% in the last three months to its shareholders.
