Greater scrutiny of Afterpay on cards

ANDREW WHITE
JULY 2, 2019
The Australian

Afterpay Touch’s business model is expected to come under increasing regulatory scrutiny as its rapid growth establishes the buy-now-pay-later provider as a larger part of the payments system.

The company’s “no surcharge” policy — which blocks retailers, who offer the service, from directly recovering the cost from customers — is believed to have already caught the attention of the powerful Payments System Board.

No surcharge rules for credit card companies, such as Visa and Mastercard, were abolished in 2003 after the Reserve Bank of Australia intervened to reduce cross subsidies that it believed distorted the payments system.

The intervention followed concerns that the cards had become a “must-have” payment method and that merchants should be able to recover the cost of providing the service directly, rather than increasing the cost of all goods and services, regardless of which payment method was used.

Afterpay charges retailers up to 6 per cent of the purchase price to provide an instalment service that allows consumers to pay the cost in four even fortnightly sums without being charged interest.

Shoppers are charged late fees if they miss an instalment. But it does not allow retailers to surcharge customers for the service.

Discount airline Jetstar is believed to be the only exception, slugging customers a 1.5 per cent fee — a quarter of the Afterpay charge — on fares bought with the service.

But Afterpay and its competitors, including Zip, have drawn the attention of the RBA’s Payments System Board, which says it has discussed the growth of buy-now, pay-later services.

“The board discussed the growth in this segment of the payments market and the implications of these services for consumers and merchants,” it said in a statement in November.

Buy-now, pay-later schemes have also been examined by a parliamentary inquiry and the Australian Securities & Investments Commission amid concerns they represented a form of credit that avoided the checks required by other forms of lending.

It is understood Afterpay avoids the “no surcharge” rule applied to credit cards because it is not defined as a credit provider.

But if its explosive growth makes it a “must-have” payment option that exemption could be challenged, giving retailers the option, but not an obligation, to surcharge customers for the cost of the service.

Buy-now, pay-later schemes have become very popular in Australia, with Afterpay Touch boasting last month it now processes more than 10 per cent of all e-commerce in Australia and has 4.3 million active customers. The service is said to be particularly popular with millennial shoppers who want to avoid the high interest charges and fees associated with credit cards

In the 11 months to May the company said $4.3 billion worth of sales had been booked through its system, up 143 per cent on the previous corresponding period.

Its growth has coincided with a slump in credit card issuance in Australia.

RBA figures show the number of credit and charge cards on issue slumped by nearly three million or 12 per cent between January 2017 and the end of March this year.

Afterpay is also leading the charge in exporting the business model to the US and Britain, where it has sparked the attention of big potential competitors.

Visa said last week it planned to roll out instalment payments — its version of buy now, pay later — via its cards from January, tapping what it sees as a potential $US1.2 billion market.

But Visa’s service is expected to have a surcharge for customers using the service, marking a point of difference.

Visa’s announcement sparked another rout in Afterpay shares on Friday and yesterday, capping a month of controversies for the company.

A capital raising and selldown by the company’s founders last month was followed by an announcement that Austrac had forced the company to review its procedures to detect and deal with money laundering and terrorism financing.