The Reserve Bank of Australia (RBA) says it will “revisit” the issue of surcharging in the buy now, pay later (BNPL) sector, flagging a new review to assess if payment sector reforms are necessary.
Under proposed changes to the Payment Systems (Regulation) Act 1998 (PSRA), the definition of ‘payment system’ and ‘participant’ will be expanded, giving the RBA more power to regulate the conduct of BNPL providers, digital wallet participants, and other new competitors in the payments space.
Speaking to the Merchant Risk Council Conference in Melbourne on Tuesday, Ellis Connolly, the RBA’s head of payment policy, said the central bank will conduct a review of retail payments regulation once that legislation is in place.
The review will focus on surcharging, Connolly said, given the rapid development of payment systems available to merchants and consumers.
“The RBA’s surcharging regulations aim to encourage consumers to use lower-cost payment methods and strengthen the bargaining position of merchants relative to payment system operators,” he said.
“However, the payments landscape is very different to when surcharging was introduced.
“Many consumers have shifted from paying by cash to cards and there is increased public concern about payment surcharges.
“So, it is time to ask whether the surcharging framework is still fit for purpose and whether any changes need to be made.”
The issue of surcharging is particularly relevant in the BNPL sector.
Although merchants are allowed to pass the cost of processing card transactions to consumers, many BNPL providers, which exploded in popularity years after the PRSA was introduced, bar merchants from passing those costs on.
“While BNPL services offer benefits to consumers, they are typically an expensive way for merchants to accept payments,” Connolly said.
Average BNPL transaction costs are around 3.5% of purchase value, which is “well above the cost of card transactions,” he added.
The RBA has already signaled it would like surcharging to become commonplace in the BNPL sector, finding in 2021 that the benefits of no-surcharge rules to new market entrants were overruled by efficiency and competition costs.
But without reforms to the PRSA, it was unclear if the RBA had the freedom to dictate the removal of no-surcharging rules across BNPL services.
“After the reforms to the PSRA, the RBA plans to revisit this issue as part of a broader review of whether the RBA’s surcharging framework remains fit for purpose,” Connolly said.
The RBA intends to consult widely on the matter when the review takes place.
For its part, the BNPL sector has broadly argued against changes to no-surcharge rules by defending the value such services offer to merchants.
In a 2021 submission to the RBA, the Australian Finance Industry Association (AFIA), which represents businesses like Afterpay and Zip, said growing competition in the sector would naturally “drive changes without regulatory intervention, including lower costs and greater operational value-add for retailers and merchants”.
“AFIA supports the proposal not to make changes to the surcharging rules,” the submission added.
“We believe there is not a clear public interest case or market failure requiring BNPL providers to remove their no-surcharge rules at this time,” while noting the importance of continual review.
When questioned about Connolly’s speech, and if it would advocate for no-surcharge rules if given the opportunity, an Afterpay spokesperson told SmartCompany the provider is already working with lawmakers on important reforms.
“Afterpay and the BNPL sector has been working with the Albanese Government to support the development of a balanced, fit-for-purpose BNPL regulatory framework that puts Australian consumers first while enabling the payments sector to continue to grow and adapt to future innovations,” they said.
Afterpay also welcomes the RBA’s recognition that separate legislative developments like BNPL credit regulation, along with factors like the cost of living, should play a role in any review, the spokesperson said.
Beyond the possibility of surcharging for BNPL payments, the future review could investigate regulations to enforce least-cost routing [LCR] for traditional card transactions.
Despite the RBA’s repeated calls for payment providers to enable cheaper card transaction pathways for merchants, the cost of those payments is still “substantial for small businesses, which pay much higher fees per transaction than large businesses,” Connolly said.
There has been “good progress” on LCR for contactless card transactions, where merchants can automatically route payments through the cheapest available pathway, Connolly said.
Even so, “there is still more work for some providers to do.
“Given this, in our upcoming review, we are planning to ask whether a formal regulatory requirement is necessary for LCR.”
The use of LCR in online transactions, competition in the e-commerce payment space, and the potential for new-school payment platforms like PayTo are also in the RBA’s sights.
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Senior Business Journalist
Focused on the small business sector, David’s work covers the political, regulatory, and economic issues facing Australian entrepreneurs. Prior to joining SmartCompany, he was a reporter for Business Insider Australia. You can follow him on LinkedIn.
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