BNPL – Australia To Surcharge or Not?

Australia is the only developed country that allows surcharging of retail payments

The Australian regulator in its wisdom is allowing ‘innovative’ BNPL apps to stop retailers from surcharging consumers - a clear breach of its regulatory duty.

Its rational – BNPL is so small it should not be regulated and because its ‘innovative”.

What a wacky set of assumptions for a regulator – are they now trying to pick winners?

BNPL LACK OF SCALE 

BNPL is tiny within the $1.3 Trillion retail payments market and after 7 years twenty two BNPL apps have sales of $11 billion – or 84 basis points.

Australian’s use 70 million cards with $712 billion annual spend.

The ‘digital’ National Payment Platform (NPP) $585 billion.

Cash including ATMs $112 billion.

BNPL $11 billion and cheques $6 billion

It’s also clear BNPL has peaked in Australia – Afterpay customer growth in ANZ for the last 3 months was zilch and sales increased by only 18% its lowest performance ever.

BNPL shares are well down from their peaks.

SPEND PER CUSTOMER IS LOW

Credit cards - $1230

Debit cards - $806

BNPL apps - $48 to 58

(March 2021 RBA figures)

Credit and debit are monthly spend, BNPL ‘bills’ consumers every 12-14 days, it’s still a paltry amount per bill, yet this is the great new thing in payments and you can only get $50 sale per bill?

IMPACT OF SURCHARGING

A consumer purchases $100 pair of jeans using a BNPL app, the merchant 'eats' the $4-$6 fee - while with a Visa/MC transaction a surcharge of 2-3% applies to the sale price - $102-$103. None of the major payment players up till now have kicked up a storm about this, which is really strange - why give a competitor a free kick?

In the last 5 months major bank CEOs have come out swinging – why?

ASIC and the RBA are sitting on their hands on this issue.

The RBA knows the answers of the potential impact surcharging will have – its own research tells them.

RBA in March 2021 detailed this research.

The results -- 50% of BNPL consumers say a 4% surcharge will make them switch to other payment type i.e. debit cards - 10% would cancel and not buy - while 40% will keep using BNPL

A 60% potential reduction in sales/revenue for BNPL is catastrophic - nothing short of life changing for all these fintech start-ups as would need new revenues quickly.

Why is the RBA holding off?

For the RBA to say all rules do not apply must mean there must be serious innovation?

BNPL HISTORY

BNPL is not new, it’s been around forever, it may be new to many Australian consumers and regulators.

Buy Now Pay Later (BNPL) is a small point of sale payment niche which is unregulated and is totally unprofitable.

My first experience in retail banking/payments was running two BNPL programs and part of a global IATA Fly Now Pay Later program in the 1980’s. (IATA’s program offered 3,6,9 or 12 months with no interest through travel agents or airlines – a great deal!)

The 80's iteration of BNPL was destroyed by increasing interest rates and technology – I fear the same fate awaits this lot.

BNPL is free but the providers have to fund the gap between paying the merchant and being paid by consumers and as with ‘no free lunch’ rule, they are totally dependent on low interest rates to allow the 4 instalments to be free. The moment interest rates increase above 2.25% BNPL apps are in real trouble. Why? Because these apps all use securitization to fund receivables and this will rocket up because of the very high bad debts – up to 30% of revenue is the average. Banks range from 2-3.5% of bad debts to revenue – if a bank had 30% it would be shut done by APRA.

The world is moving to real time digital payments based on a 2004 ISO messaging standard – the benefits are fast, cheap digital payments which ship much more data. This is the biggest technology threat to BNPL who currently depend on Visa/MC payment rails and interchange revenues.

This projection for European MSC shows the issue - regulators will be forced to take action.

REGULATION

Australia has avoided this so far, the UK with volumes one quarter of Australia is going to regulate, as are Singapore. The EU and USA are considering regulation against a back drop that is totally different e.g. 90 UK MPs signed a joint letter requesting regulation – that’s unthinkable in Australia with Senator Bragg and his supporters saying leave BNPL alone.

Who is right and what are the impacts of not regulating?

This is a debate Australia doesn’t want to have, preferring to believe the PR and spin.

BNPL APPS

The first BNPL apps started with Klarna in Sweden in 2005, followed by Afterpay Europe 2010 and Affirm USA in 2012.

BNPL did not arrive in Australia until “Afterpay” in 2014 – Zip which started the year before as a lending company jumped on board the app concept.

So what’s innovative about Australia’s BNPL?

What do they do differently than the early BNPL apps?

BNPL apps allow quick decisions online or at point of sale, this is achieved by using AI and interfaces which link directly to merchants web sites and/or point of sale.

BNPL requires not only integration into a retailer’s ecommerce platform but also into their physical point of sale (when required). Fintech start-ups like Afterpay Europe, Affirm and Klarna created this niche by developing the Application Programming Interfaces (API) & Software Development Kits (SDK) to make this happen.

 Most banks and card issuers processors don’t offer a downloadable API or SDK for retailers, currently making it difficult for banks and issuers to directly enter this niche.

The big players have or will bridge this gap quickly as it’s not a unique technology as PayPal, Citibank, Amex and CBA show.

AFTERPAY – WHATS IN A NAME?

 Afterpay Australia has a remarkable similar name to Afterpay Europe. Who was first and who is innovative?

 Afterpay Europe was founded in 2005 and launched in 2010 in Holland – it was purchased in 2014 by Bertelsmann and you wouldn’t want to mess with them.

 Read the history -- Industry Interview: AfterPay by verdictfinancial.com | AfterPay

Afterpay Australia was launched in 2014, they purchased a UK BNPL brand ‘Clearpay’ in 2018, paying $18 million for a one year old start-up – guess why?

They use ‘Clearpay’ in Europe because they do not own the rights to ‘Afterpay’ in Europe.

What’s innovative about this – seems to me nothing. Same brand, same name, same product except they operate in different geographies.

One thing is certain in payments you need scale and ubiquity to survive in the long term and BNPL apps have neither. 

So…. maybe the RBA is not aware of the history or just goes alone with the spin and bluster?

 Former RBA expert says surcharging policy is anti-competitive

 BANKING DAY George Lekakis 2nd June 2021

 Christos Fragias

A former Reserve Bank payments expert has weighed into the surcharging debate, arguing that the regulator’s toleration of “no surcharge” rules in buy now pay later schemes is errant policy.

Christos Fragias, a Sydney consultant who managed the rollout of a payments incident reporting system at the RBA between 2012 and 2016, believes the regulator should be applying standards on surcharging consistently across the payments industry.

In a consultation paper released last week the RBA flagged it would allow buy now pay later providers to continue to prevent retailers from surcharging customers for purchases made through their platforms.

However, the RBA’s stance appears inconsistent with its 2003 decision to slap a ban on “no surcharge rules” that previously operated in the Visa and Mastercard card schemes.

 Fragias maintains that the RBA’s inconsistent approach to surcharging across the payments industry undermines the principle of regulatory neutrality in the payments market.

“The RBA needs to maintain consistency in its regulation of competing payment methods,” he said.

“There is a strong perception in the payments industry that the regulator’s approach favours buy now pay later as a method of payment despite the fact it is more costly than debit and credit cards.”

Fragias says that the inability of merchants to pass on to customers the fees they pay BNPL schemes gives providers such as Afterpay an unfair advantage over providers of surcharged methods such as debit and credit cards.

“Buy now pay later schemes are leveraging that regulatory advantage,” he said.

Fragias is concerned that as technology advancements create new payments models, the RBA is sending a confused message it plans to vary the way it applies regulatory standards between emerging and established modes of payment.

In its recently released consultation paper, the RBA restated its longstanding view that surcharging promotes competition and efficiency in the payments system.

However, it defended the proposed retention of no surcharge rules for BNPL schemes, arguing they help new services to build customer and merchant networks.

“The board has reached the view that there is not a clear public interest case for requiring any BNPL providers to remove their no-surcharge rules at this time,” the RBA states in the consultation paper.

“BNPL still accounts for a small share of payments in the economy when compared to some other electronic payment methods such as cards, despite recent strong growth.”

Fragias’ critique of the RBA’s arbitrary application of surcharging standards has wide-ranging support across the banking industry and the consumer movement.

Leading banks such as CBA and ANZ want the concession on surcharging standards afforded to BNPL schemes reversed, as do the country’s most prominent consumer advocates, Choice, the Consumer Action Law Centre and Financial Counselling Australia.

In a joint submission to the RBA’s retail payments review, the consumer groups argued that no-surcharge rules in BNPL schemes were anti-competitive.

“Our organisations strongly support the RBA making changes to payments regulation to enable merchants to pass on surcharges they incur for payment methods such as BNPL,” the consumer advocacy groups told the RBA.

“This approach is fair as it signals to customers the costs of using different payment options and encourages customers to choose cheaper payment methods.

“It also prevents other customers from cross-subsidising other more expensive forms of payments and means that businesses do not inflate the cost of goods and services to cover costs they incur but cannot recoup through surcharges.”