RBA changes its tune on BNPL ‘no-surcharge’ rules: What does it mean for SMEs?

Buy-now, pay-later providers should not be able to prevent retailers from passing on the costs of payments to customers, the Reserve Bank of Australia has recommended, in a decision marking a change of tune for the bank and potentially a change of direction for the whole industry.

The recommendation was made in the RBA’s Conclusion Paper for its Review of Retail Payments Regulation, released on Friday.

The board concluded it “would be in the public interest” for BNPL providers to remove the controversial so-called ‘no-surcharge’ rules, and said the RBA will work with the Treasury on regulatory approaches to making the change.

It seemingly marks a change of heart for the RBA. In December last year, governor Dr Philip Lowe suggested the rules are “unlikely” to be scrapped, suggesting they help promote competition and keep costs down for retailers.

This is particularly true when merchants feel they have no choice but to offer BNPL products, because of consumer demand, he said at the time.

BNPL players can charge between 3% and 6% in fees to merchants, and no-surcharge rules in their contracts prevent the businesses from passing any of that cost on to the consumer.

The practice has drawn considerable criticism from small businesses, who say BNPL fees eat into already thin margins.

A suite of self-regulatory measures published by the BNPL sector in 2020 also failed to address the issue.

Speaking to SmartCompany, small business accountant and founder of SBO Financial Jason Andrew says if the RBA’s latest recommendation is implemented, it will have an impact on the sector.

Businesses are now facing supply chain challenges and increased shipping costs; staffing costs are increasing and the price of raw materials are going up. Add in pressure from COVID-19 lockdowns, and SMEs are seeing margins squeezed more than ever.

In the past, businesses have been reluctant to pass these costs on to customers, being more likely to absorb them themselves, Andrew explains. That’s not necessarily the case anymore.

“In this climate, they don’t have any choice.”

It will be up to the individual business owner as to whether they do pass on the BNPL surcharge or not. There’s always a risk of losing the sale.

But Andrew expects we would see at least some passing those costs on.

Over the past year or so, we’re also seeing the BNPL sector becoming increasingly crowded, including new offerings from the likes of PayPal and CBA which don’t come at any additional cost for the merchant.

However merchants will be bound by what consumers want. While they may try to push customers towards a fee-free option, that relies on customers being signed up with another provider.

Andrew says the BNPL sector is evolving, and the RBA’s recommendation is indicative of that.

When it comes to fees, “it’s a race to the bottom”, he says.

Those that have previously made the majority of their revenues through merchant fees are moving into other offerings, he notes.

Afterpay is gearing up to launch its Money by Afterpay financial management app, while Zip has made its move in small business financing.

“BNPL is becoming a feature, rather than a standalone product,” Andrew says.

It’s up to the individual fintechs how they evolve in order to remain competitive, he adds.

“It’s becoming a very crowded space.”