Commonwealth Bank’s announcement that it soon will launch a house-branded buy now, pay later product is an alarming development for investors exposed to BNPL monoliners such as Afterpay.
As the country’s largest retail bank and merchant acquirer, CBA’s entry into BNPL poses the greatest threat to the pricing models of market incumbents that currently slug merchants around 4 per cent of the value of consumer purchases.
The key to the growth of BNPL in Australia has been that nearly all providers prevent merchants from surcharging customers to retrieve their costs of acceptance.
That has reduced the appeal of credit cards because consumers have learnt they can avoid surcharges and other costs associated with a drawdown on a revolving facility.
The reason why CBA is such a threat to Afterpay, Zip and their many imitators is that the bank says it will not impose a new charge on merchants for accepting payment through its BNPL scheme.
This gives merchants a big incentive to accept CBA’s BNPL product rather than the more expensive services offered by the monoliners.
CBA indicated yesterday that the new service will be funded out of the existing standard merchant fees that it and other acquiring banks charge businesses for accepting card-based payments.
However, there seems to be a lot more behind how this BNPL scheme is to be funded.
CBA is offering its service through a virtual Mastercard that customers will have to download to a mobile device.
Banking Day has been told by several industry sources that Mastercard will distribute an average interchange fee to the card issuer – Commonwealth Bank in this case – at 80 basis points of the value of the BNPL transactions.
This is the really big story to emerge from CBA’s foray into BNPL because it opens a new theatre of action in the ongoing war between the major banks and the Reserve Bank on the setting of interchange caps.
Technically, Mastercard could set the interchange fee distributed to the card issuer at any level because there is currently no RBA cap for BNPL payment schemes.
The RBA interchange caps were last set in 2017 and only apply to credit card and debit card transactions.
Mastercard appears to have set its BNPL interchange fee in line with the highest rate allowable for premium credit cards at 80 basis points and way above the weighted average rate for standard credit card transactions.
Under the prevailing regulatory settings there is nothing wrong with this BNPL interchange arrangement but its sustainability could be tested if the RBA decides to set the weighted interchange cap for BNPL at around 50 basis points or lower.
The RBA is currently reviewing the interchange caps for credit and debit card transactions, with many payments experts expecting the caps to drop further.
An issue that remains unclear is whether all of the interchange fee earmarked for the card issuer in CBA’s BNPL program is to be funded through the merchant service fee.
Blended rate merchant service fees currently average between 1.1 per cent to 1.4 per cent.
If CBA is right to say that retailers will not