Reserve Bank of Australia (RBA) data shows that over 40% of 18 to 39-year-olds have used a Buy Now, Pay Later (BNPL) service in the past year, compared to only 10% for those aged 65 and over. However, their data shows that between 2019 and 2022, usage has increased across all age groups. Despite this, total BNPL purchases remain at around only 2% of total debit and credit card purchases – although it can be as high as 30% of sales for some individual online merchants.
Two regulatory interventions are likely to impact future BNPL activity. Firstly, the Treasury has drafted legislation under review to bring BNPL into a new sub-set of the National Consumer Credit Protection Act, forcing BNPL providers to adopt a form of the Australian Securities and Investments Commission (ASIC)’s Responsible Lending requirements and to undertake Credit Bureau checks. This is likely to stymie account growth – growth which is already slowing – as the market is almost fully penetrated by those interested in the value proposition.
Secondly, the RBA’s Payments System Board has indicated that it would move to ban the ‘no-surcharge rules’ currently used by BNPL providers. However, it cannot do this until the legislation governing the RBA’s payments role – the Payments Systems (Regulation) Act 1998 (PSRA) – is changed to address new payment technologies and business models, which should happen in 2024. Permitting merchants to surcharge BNPL purchases (just as with card-based purchases) is likely to provide them with more bargaining power on the pricing charged by BNPL providers. Additionally, if surcharges are applied, it would increase the costs of BNPL for consumers.
With the BNPL market growth already slowing, several BNPL players exiting, and PayPal and banks offering the equivalent ‘pay in four’ instalment products for no extra cost to merchants, the additional regulations are likely to limit the future expansion of the BNPL industry in Australia.
Some regulatory activities may impinge on digital wallets in Australia. As noted above, changes to the PSRA will permit the RBA to have purview over digital wallets, and it will likely use its new powers to explore in detail the charges being levied by some players in this value chain. At the same time, the Australian Competition and Consumer Commission (ACCC) is reviewing several competitive limitations, such as access to the NFC interface, that are imposed by some digital wallet providers. The regulators in the European Union seem to have broken new ground on Apple’s NFC quarantine, and a similar removal of this restriction may come from the ACCC.
Digital wallet use in Australia is already high by world standards. Over 95% of all card transactions at physical point-of-sale (POS) are contactless, and more than 50% of these are made on a mobile device. Should Apple not react by withdrawing Apple Pay (which is most unlikely), then any actions by the RBA and the ACCC are likely to further expand the use of digital wallets and improve their economics for card issuers.
The removal of Apple’s NFC quarantine may result in the deployment of new digital wallets by other players, possibly the major supermarkets, including a combination of payment, loyalty, and other functions in a single tap.
In Australia, debit and credit cards make up approximately 66% of all payment transactions (including cash), across all channels. Furthermore, we estimate that the merchant service fee paid on these card transactions in 2023 amounted to roughly USD 3.9 billion, of which almost 10% was recouped by merchants applying a surcharge.
A tipping point appears to have been reached among Australian consumers as they show a growing backlash towards what many see as the endemic surcharging of card payments by retail merchants. As increasingly more consumers have moved from paying with cash at a physical POS to paying with cards, what was once an occasional ‘hit’ with a card surcharge has become – for some – ‘a constant 1% to 1.5 % being added to my bill’. People have raised the topic with me at multiple different non-payment forums and events over the last few months, such that the infrequent ‘surcharging complaint’ seems to have moved to a constant clamour.
Currently, consumers who are very upset by surcharging tend to revert to cash at physical POS.
Over the years, the merchant’s cost of accepting debit card transactions in Australia has been reduced by various requirements and limits published by the RBA. One could argue that the cost of debit card acceptance is now equal to the cost of accepting cash – that is if merchants truly calculated the real cost of accepting cash, which many smaller merchants still believe equates to zero. Large merchants, especially those who have conducted their internal studies on the topic, seem to have a much stronger understanding of the cost of accepting cash – including all the security and staff safety issues that surround it.
If debit card acceptance incurs the same cost as cash acceptance, and there is a growing consumer backlash to surcharging, there would seem to be a case for the RBA to ban merchants from surcharging debit card transactions in Australia – at least at the physical POS. Such a move would appear to address consumer concerns, whilst not increasing the true cost of payments acceptance for merchants (or the payments ecosystem). The Head of Payments Policy at the RBA has recently stated that this will be an issue to be covered in their next review of retail payments, which is planned for later in 2024.
We would expect electronic payments to continue to grow rapidly, both as the economy and population grow, and cash and cheques (due for termination by 2030) to be displaced. The use of the underlying payments systems in Australia will not change dramatically in the next five years, but:
The real-time New Payments Platform (NPP) will become embedded in the payments system and slowly displace the old ACH/Direct Entry, although full replacement will probably take until 2035.
More ‘veneers’ will appear over the existing payment rails (like Apple Pay and in-app payments like Uber) to provide new and innovative customer interfaces – consumers see these as new ways to pay, but the transactions are usually undertaken by card or account-to-account (A2A) payments.
New forms of POS interactions will appear/grow, e.g. mobile NFC (both to make and receive payments), QR/Bar codes, burning loyalty points, Bluetooth, wearables, etc.
The use of smartphones in banking, finance, and payments will increase, especially if there is value added over physical cards (but you’ll still need cards to travel overseas).
In terms of demographic considerations, the biggest move that has occurred over the last ten years or so is that younger people have embraced debit cards and eschewed credit cards – such that credit cards in Australia are the new ‘Senior’s Card’, as only old people have them. The younger demographic has also adopted in-app payments faster than their older counterparts, with most in-app payments being funded by a linked debit card.
For the older generation, the termination of cheques and the scarcity of cash are likely to be issues that they will need to overcome, forcing them to move into the electronic payment environment.
Lance Blockley is Managing Director of The Initiatives Group, a consulting firm specialising in payments. He has over 35 years of experience in senior management and consulting in the UK, the US, Asia, and Australia. Lance has led the consulting team on several industry-wide assignments, including the removal of signature (PIN@POS) on card payments in Australia in August 2014. Before establishing the firm in 2013, Lance ran Edgar, Dunn & Company in APAC for over ten years, also acting for a term as global Managing Director.
The Initiatives Group is a specialist payments consultancy, headquartered in Sydney and operating across the APAC region. The consulting team at The Initiatives Group has advised participants in the payments market since the 1990s – including issuers, acquirers, third-party processors, technology providers and associations. We help solve the financial industry’s issues, such as payment strategies, customer profitability and retention, credit and fraud risk, leveraging new technologies, and assessing new market and product opportunities.
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