Canberra will closely watch RBA move on Afterpay 'no surcharge' rule

The inquiry into buy now, pay later operators risks being viewed as clashing with the Morrison government’s efforts to promote fintechs and reduce living costs for consumers.

John KehoeSenior Writer

Oct 23, 2019 — 11.03am

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The Reserve Bank’s investigation into the “no surcharge” rule enforced by buy now, pay later operators such as Afterpay risks being viewed as clashing with the Morrison government’s efforts to promote fintechs and reduce living costs for consumers.

The RBA’s surprise move last week to examine whether policy action was required to target buy now, pay later operators from preventing merchants passing card transaction costs on to customers did not go unnoticed in Canberra.

Prime Minister Scott Morrison and Treasurer Josh Frydenberg have put a big onus on fintech start-ups to challenge the dominance of major financial services companies.

The RBA never has and will not force stores to pass on surcharges.

The government is yet to be fully briefed by the RBA on the review, which will be conducted in 2020.

However, the initial word from government sources suggests the RBA will need a very good reason to allow stores to pass on surcharges to consumers for merchant fees that can range from 3 per cent to 7 per cent for buy now, pay later deals.

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Yet, behind the RBA’s preliminary move lies a history that is instructive to understand the policy framework the central bank might apply to Afterpay, Zip Pay and other buy now, payer later companies.

Credit card operators such as Visa, Mastercard and American Express are not allowed to prevent merchants from passing on surcharges to consumers. The pass-on cost is not mandatory, but is permitted should a retailer elect to recover the cost from customers.

The RBA is now considering levelling the playing field for the emerging buy now, pay later system – popular with Millennials – as part of its broader review of card payment regulations, which takes place every five years.

The RBA will look into whether consumers are unwittingly bearing the cost of merchant charges and whether those who pay cash or use debit cards are cross-subsidising Afterpay users.

A central bank inquiry about 15 years ago found some credit cards offered big rewards such as frequent flyer points.

Some retailers were forced to pay much higher merchant fees on such high-reward cards – like American Express – often about 3 per cent.

By definition, the seller either had to suffer a lower profit or increase their prices across the board to cover the costs.

Ultimately, the RBA decided to remove this cross-subsidy by incentivising consumers to use lower-cost payment methods.

It did so by banning the “no surcharge” applied by Visa, Mastercard and American Express, and enabling the true cost to be paid by individual card users.

The RBA's modern-day investigation of Afterpay and other buy now, pay later operators will again revisit these issues.

For example, a retailer may sell a $100 jumper to an Afterpay consumer. Afterpay immediately pays the merchant $97 and bears the credit risk of collecting the $100 (a $3 margin) from the customer through four equal instalments due every fortnight.

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UBS estimates that Afterpay charges merchants a 30¢ fixed transaction fee plus a commission on the sales value ranging between 3 per cent and 7 per cent.

The RBA never has and will not force stores to pass on surcharges.

It might find that merchants have a right to apply the surcharge, by potentially outlawing the “no surcharge” rule imposed by buy now, pay later providers.

The central bank's official review will run through 2020 and is at a preliminary stage.

The Reserve has strong powers to regulate the payments system and the participants. It does not necessarily need the blessing of the government to reform the surcharge rules, but ministers in Canberra will be paying close attention.