Buy now, pay later operators typically impose a fee on merchants of between 3 per cent and 6 per cent, but say these retailers cannot pass these costs on to consumers.
But the Reserve Bank of Australia has indicated in an issues paper ahead of a review into retail payment laws that it was considering ending the “no surcharge” rule imposed on merchants by providers such as Afterpay, on the basis that it was leading merchants to increase the prices of goods.
As evidence of the fact the business should be viewed as part of a retailer’s marketing expenses, Mr Eisen pointed to the fact that in October alone, the company says it gave its merchants 10 million lead referrals.
“Retailers have chosen Afterpay because we’re a more effective channel to customers. Millennials, for example, are a tough audience for retailers because they don’t respond to traditional advertising and you have to connect in different ways,” he said.
“If you look at the retailers, one of their biggest line items is marketing promotion. Much more of Afterpay’s service would be classified as marketing and promotion than mere transaction processing.”
Analyst: exposed to a ‘key risk’
Mr Eisen also argued that most retailers did not engage in surcharging, even when they were permitted to do so.
“Looking at apparel, beauty and department stores, you rarely see it,” he said.
While Afterpay was still assessing the central bank’s issues paper, a note issued by UBS on Friday flagged concerns the business would lose customers if they were presented with the “true cost” of using buy now, pay later services.
“We have previously highlighted regulatory intervention to the ‘no-surcharging’ rules applied by Afterpay as a key risk to our underlying sales forecasts and valuation,” the broker said.
“Afterpay is most exposed to this risk, in our view, given its economics relies on merchant fees. “
For rival buy now, pay later provider Zip, UBS believed the impact of permitting surcharging would be less detrimental, as it had a more diversified business and its merchant fees tended to be lower.
Zip co-founder Peter Gray said retailers offering Zip valued the benefit of giving its customers a range of payment options.
“Choice is important here. It is up to merchants to decide if they wish to engage Zip as a payment option, as it is for consumers to decide if they wish to use Zip as a payment service,” he said.
The RBA first introduced surcharging regulations in Australia in 2003 and these were modified in 2013 to limit the amount that could be surcharged to a “reasonable” cost for card acceptance, before narrowing this definition in 2016.
The Australian Competition and Consumer Commission is responsible for ensuring there is no excessive surcharging in the market.
While the RBA is in favour of surcharging, the practice is now banned for all retail credit and debit card transactions in the European Union, including Britain, and similar bans are being enacted in some US states.