Reserve Bank of Australia Favors Surcharging in BNPL Sector

The Reserve Bank of Australia (RBA) plans to review the issue of surcharging in the buy now, pay later (BNPL) sector.

This review comes as the RBA aims to expand its regulatory powers and assess whether payment sector reforms are necessary, SmartCompany reported Wednesday (June 19).

The focus of the review will be on surcharging, considering the changing payments landscape and the rapid development of payment systems available to merchants and consumers, according to the report.

Under proposed changes to the Payment Systems (Regulation) Act 1998 (PSRA), the RBA intends to redefine the terms “payment system” and “participant,” granting it more authority to regulate the conduct of BNPL providers, digital wallet participants and other emerging players in the payments space, the report said.

The review will primarily focus on surcharging, which has become a significant issue in the BNPL sector, per the report.

While merchants are allowed to pass on the cost of processing card transactions to consumers, many BNPL providers prohibit merchants from doing so, the report said. This discrepancy has led to higher transaction costs for merchants in the BNPL sector, with average costs around 3.5% of the purchase value.

The RBA has expressed its desire for surcharging to become common in the BNPL sector, as it believes the benefits of no-surcharge rules for new market entrants are outweighed by efficiency and competition costs, per the report.

The Australian Finance Industry Association (AFIA), which represents BNPL providers like Afterpay and Zip, has generally opposed changes to the no-surcharge rules, according to the report. AFIA argues that competition within the sector will naturally lead to changes without regulatory intervention, resulting in lower costs and greater operational value-add for retailers and merchants.

The RBA plans to consult widely on the matter and gather views from the BNPL sector during the review process, the report said.

Australian consumers are increasingly embracing BNPL, the RBA reported in November 2023. The RBA found that nearly a third of Australians 18 and older had used the installment payment offering in the 12 months prior to being surveyed, up from about a quarter of consumers in 2019.

In addition to surcharging, the review may also explore regulations to enforce least-cost routing (LCR) for traditional card transactions, per the SmartCompany report. The RBA has repeatedly called for payment providers to enable cheaper card transaction pathways for merchants, particularly small businesses. The review will also consider the use of LCR in online transactions and competition in the eCommerce payment space.