Introduction

Imagine shopping for your favorite items online and being surprised at checkout by an unexpected surcharge just for using a "buy now, pay later" (BNPL) service. As online shopping grows and BNPL services become more common, consumers and merchants alike are affected by the fees these services impose. The Reserve Bank of Australia (RBA) is looking to revisit the surcharging policies within the BNPL sector, creating potential significant impacts on how online transactions are conducted.

In this post, we’ll explore why the RBA is considering revisiting surcharging rules for BNPL services, the potential implications for merchants and consumers, and broader industry reactions. By the end of this article, you will have a clear understanding of the complexities involved in BNPL surcharges and the potential future landscape of Australia’s payment systems.

Background on Payment Systems and Surcharging in Australia

Historically, the Australian payment system has undergone extensive regulation to create fair practices between merchants and payment processors. The Payment Systems (Regulation) Act 1998 (PSRA) enables the RBA to intervene in the payments market to promote competition and efficiency. One of the pillars of this system is surcharging—the practice permitting merchants to pass on the cost of payment processing to consumers.

The Need for Reform

Given the rapid adoption of card payments over cash and emerging new payment methods, the landscape has shifted dramatically since the PSRA’s introduction. The need to reassess these practices has become evident, particularly with the explosion of BNPL services.

BNPL services like Afterpay, Zip, and others offer consumers the ability to spread the cost of purchases without traditional interest fees, but merchants face service fees significantly higher than traditional card payments, averaging around 3.5% per transaction.

The RBA's Concern and Proposed Review

The Current State of Surcharging

Presently, the RBA’s surcharging frameworks are designed to encourage consumers to use cheaper payment methods and empower merchants against payment system operators. However, BNPL services typically prohibit merchants from adding surcharges to cover the costs of these payment options, making the process more expensive for the sellers.

In response to these concerns, the RBA has signalled that it intends to revisit the surcharging rules within the context of an upcoming review of retail payments regulation. This review aims to assess the continued relevance and fairness of the existing framework and consider whether new rules are necessary to address the evolving payment landscape.

Planned Expansions to the PSRA

Under the proposed changes to the PSRA, the definitions of ‘payment system’ and ‘participant’ would be broadened. This change would provide the RBA with enhanced authority to regulate BNPL providers and other modern payment service entities, offering a potential pathway to enforce surcharges across the board.

The Implications for Merchants

For merchants, the ability to pass BNPL surcharges to consumers would effectively lower the costs associated with accepting these forms of payment. Given the substantial fees merchants currently face, any regulatory shift allowing for surcharging could reduce operational costs, particularly for small businesses that don't have access to lower fee structures enjoyed by larger businesses.

Consumer Impact

For consumers, the potential change may lead to increased transparency in the true costs of using BNPL services. While this could deter some from using these payment options, it might also lead to more informed decision-making regarding how payments are managed.

Industry Reactions

Opinions from BNPL Providers

BNPL providers have largely resisted changes to surcharge rules, maintaining that their services provide significant value to merchants and consumers alike. The Australian Finance Industry Association (AFIA), representing major BNPL players, contends that increased competition within the sector will naturally drive down costs without necessitating regulatory intervention.

Providers like Afterpay emphasize that any regulatory framework should balance consumer protection with market growth and innovation. These companies suggest that the current no-surcharge rules promote a seamless shopping experience, which is a significant selling point for consumers and merchants. Additionally, they argue that market self-regulation may negate the need for imposed surcharges.

Retailers' and Small Businesses' Perspective

Retailers and small businesses, on the other hand, face higher operational costs due to the inability to surcharge, particularly when BNPL service fees surpass those of traditional card payments. Many in the retail sector welcome the possibility to pass these costs onto consumers, promoting fairer trading terms and potentially reducing the overall financial burden on merchants.

Beyond Surcharging: Additional Review Areas

Least-Cost Routing (LCR)

Another area under review is the enforcement of least-cost routing (LCR) for card transactions. LCR involves routing payments through the cheapest available processing option, which could substantially benefit small businesses. Despite the RBA's encouragement, the uptake of LCR remains inconsistent, particularly for online and contactless payments.

Future Payment Platforms

The RBA’s review will also examine the potential for emerging payment platforms like PayTo, a system that facilitates direct account payments, to enhance competition and offer lower-cost alternatives to existing retail payment systems. As these new technologies are integrated, their impact on both surcharging practices and overall transaction costs will be closely monitored.

Conclusion

As the Reserve Bank of Australia gears up to reassess the surcharging framework within the BNPL sector, the resulting regulatory implications could significantly transform how both merchants and consumers navigate the digital payment landscape. With the evolving definition of payment systems slated to expand the RBA's oversight, potential changes such as enforcing BNPL surcharges and facilitating cheaper payment routes may soon be on the horizon.

Whether these changes will benefit all stakeholders remains to be seen, and the RBA’s planned consultation with industry participants will be critical in shaping a balanced and effective regulatory approach. One thing is clear: the dynamics of online payments in Australia are poised for potential transformation, all in the pursuit of greater fairness and efficiency.

FAQ

1. What are BNPL services?

BNPL, or "buy now, pay later," services allow consumers to purchase items upfront and pay for them in installments over time, often without traditional interest fees.

2. Why is the RBA considering changes to BNPL surcharging rules?

The RBA is reviewing the surcharging rules to address the high costs merchants incur when accepting BNPL payments and to ensure the payment system remains fair and efficient.

3. How might these changes affect consumers?

If surcharges for BNPL payments are allowed, consumers may face additional costs when using these services. This change aims to reflect the true cost of using BNPL options more transparently.

4. What is least-cost routing (LCR)?

LCR is a payment process that routes transactions through the lowest-cost network, which can reduce fees for businesses accepting card payments.

5. When will the RBA's review take place?

The RBA's review will commence after the proposed changes to the Payment Systems (Regulation) Act are enacted. The exact timing has yet to be specified, but extensive industry consultation will follow.

By staying informed about these potential regulatory changes, both consumers and merchants can better navigate the evolving payment landscape and make informed financial decisions.

RBA to Consider Allowing Merchants to Pass on BNPL Surcharges to Customers

Table of Contents

Introduction