ASX-listed buy now, pay later (BNPL) shares, such as Afterpay Ltd (ASX: APT), are back under the microscope this afternoon. This follows the Reserve Bank of Australia (RBA) posting its conclusions paper from its review of Retail Payments Regulation.
While there were a number of changes suggested by the RBA, the one which sticks out like a sore thumb involves a modification to BNPL providers 'no-surcharge' rule.
Despite the conclusions, the Afterpay share price is trading 0.85% higher to $127.41 this afternoon.
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Changes that could weigh on Afterpay shares
Since their rise to prominence, ASX-listed BNPL shares have been under the watchful eye of regulators. In fact, the Reserve Bank of Australia has been undertaking its review of the payments space since November 2019. However, today marks the central bank's final set of conclusions.
While the suggestions spanned the broader payments industry, the BNPL sector was spotlighted on the topic of surcharging. Currently, the bank's existing surcharging rules allow merchants to pass on the fees associated with accepting credit and debit cards. Yet, BNPL services typically have 'no-surcharge' rule that bars merchants from passing on the costs to consumers.
Initially, the RBA had considered this stipulation promoted innovation and competition among payment systems as new players built up their consumer network. Although, now the central bank is considering the need for a balanced competitive environment between BNPL and card providers.
This followed feedback from merchants indicating BNPL services had fast become an essential offering for retailers. As a result, the no-surcharge rule has increased payment costs for merchants. As such, the RBA feels it is necessary to provide competition in a space where merchants feel it necessary to provide a particular payment method for themselves to stay competitive. In which case, a removal of the rule could weigh on Afterpay shares.
From its conclusions paper, the RBA's board stated:
Taking these factors into account, the Board has concluded that it would be in the public interest and consistent with its mandate to promote competition and efficiency in the Australian payments system for BNPL providers to remove their no-surcharge rules, so that merchants have the ability to apply a surcharge to those payments if they wish. This approach is consistent with the Board's long-standing principle in relation to no-surcharge rules.
Could it put the Afterpay/Square deal on thin ice?
From this, the bank is now engaging with Treasury on regulatory approaches. Although the markets don't appear to be reacting with much disdain this afternoon, one analyst is seeing red for ASX BNPL shares. According to analysts at UBS, the news could negatively impact the economics on which BNPL companies operate.
Additionally, the bearish broker warned of what the development could mean for Afterpay's deal in the making with US payments giant Square Inc (NYSE: SQ). Specifically, UBS considers any changes to the no-surcharging rule a threat to the completion of the merger.
We see this as a materially negative development for Afterpay in particular given its reliance on high merchant fees to fund its economics, and incrementally negative for Zip (though Zip is more reliant on consumer fees to fund its economics). In our view, we see a strong risk that overseas regulators could impose similar restrictions on BNPL. We also see this development as increasing completion risk for Square's proposed acquisition of Afterpay.
Tom Beadle – UBS
Despite the analysts' bearish sentiment, many ASX-listed BNPL shares, including Afterpay, are in the green this afternoon.
