While Afterpay's fundamentals look strong, the company has benefited from a favorable regulatory environment. It has been able to develop its business model free of the regulatory constraints that affect the credit card industry. But as BNLP becomes more integral to consumer credit in Australia, regulators will inevitably take a greater interest in companies like Afterpay.
The question is, will the Reserve Bank of Australia (RBA) decide that BNLP operators should be treated more like credit cards? One of the reasons Afterpay is so popular is that BNPL costs nothing to consumers as long as they make their installment payments on time. Merchants must agree to pay the transaction fees if they want to offer Afterpay. They agree because it brings them more business.
Yet if merchants could pass on transaction fees to customers - as credit cards can - Afterpay might lose some of its luster. In a survey conducted last year, UBS found that 2/3 of consumers would eschew Afterpay if they had to pay a 4% fee per transaction.
UBS also found that Afterpay users are typically not privy to the fact that merchants have to pay 4% of the cost of goods per transaction for offering the service. After learning that fact, 45% of survey respondents said they would no longer use BNPL at small businesses.
No wonder that Afterpay told the RBA that it should not be regulated as a payments system but as a sales and marketing company. CEO Anthony Eisen describes the company as "a customer acquisition channel for merchants."
RBA does not appear to be buying that argument. In a recent report it suggested that all businesses with a key role in payments be subject to regulation, provided "doing so would promote competition and efficiency and control risk."