Did you know that every time you buy something using a buy-now pay-later (BNPL) service, the shop pays about a 4 per cent fee? Well, that could be about to change and you aren’t going to like who could have to cover that cost.
BNPL services are one of the most expensive payment methods out there. But there’s currently a ban on that being passed on to the customer, unlike the 1.25 -1.5 per cent charges for using a credit card that often end up as a surcharge for you.
BNPL providers don’t let merchants pass on the fees as part of sidestepping certain regulations around credit provision – but the Reserve Bank of Australia (RBA) is considering overruling the ban.
The changes come following a separate overhaul to BNPL’s credit regulation and paint a concerning picture for how some of our most vulnerable. But, could thrusting the true “pain of paying” onto people also stop them spending more?
What could BNPL look like with surcharges?
Consumer scrutiny of surcharges has been on the rise since the use of digital payments has accelerated.
Now, when paying by card, a small percentage transaction fee is not uncommon.
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The same could soon be true for BNPL transactions, but potentially at a much higher rate.
Where a 1 per cent card transaction could make a $100 purchase cost $101, higher surcharging rates mean higher prices.
That same $100 transaction could cost up to $104 if the entire merchant fee was passed on – though it is unclear how much would or could be passed on to consumers.
In terms of what this looks like for consumers, there are two sides to the proverbial coin.
From rising prices to the rising costs of paying those prices
As the cost of living crisis continues to pinch household budgets, one of the most obvious and immediate concerns around BNPL surcharges is that customers already paying more for goods and services and will also have to pay more to pay more.
Australians are already looking to BNPL to manage cashflow on essentials like groceries as costs rise.
The idea of paying a surcharge to do so paints a concerning picture for how the change could affect those most vulnerable to increased costs, and again raises the question of why transaction fees ever reach consumers in the first place?
Surcharges also interfere with many of BNPL’s original promises.
The idea of being able to spread costs without interest is understandably attractive – but if a percentage surcharge is paid upfront, is the appeal still there?
If it’s not, could the change actually open the door to increased consumer diligence about the risks of BNPL?
Of course, surcharges aren’t interest, so the ‘interest-free’ promise still holds up.
But paying a percentage of an item’s cost on top of the purchase price?
What’s that saying about looking like a duck and quacking like a duck?
Could BNPL surcharges foster more sensible BNPL usage?
As a financial behaviour specialist, I’ve spent many years observing the behavioural and psychological nature of BNPL services.
I have long held the belief that while BNPL is a great idea in theory, behaviourally it presents a challenge for consumers, purely because humans are inherently irrational about money and spending.
Spreading costs fee-free on things we need is a great idea.
To say that consumers won’t spend more money on things they wouldn’t have otherwise purchased purely because they’re able to defer the consequences to later would be to completely ignore the principles of human behaviour.
Providers themselves even say that the average customer spend is higher when they transact with BNPL.
And so I do wonder whether a surcharge on BNPL could increase friction around use of the services and therefore buy less things they don’t need.
Could the need to accept a surcharge of 2, 3, or even 4 per cent prompt a consumer to consider another payment method? Probably.
Could that then allow consumers to better see the consequences of their BNPL spending? Potentially.
Surcharges could increase the ‘pain of paying’
The behavioural concept of the ‘pain of paying’ refers to the discomfort a consumer will experience when paying for certain goods and services.
The nature of BNPL helps to override the pain of paying, by only charging a customer a portion of the full expense upfront.
In some cases, consumers don’t pay anything upfront.
Surcharging, however, could make a consumer consider another cheaper payment method, thus exposing them to the pain of paying full price upfront.
If they’re more likely to buy when they only have to pay a quarter of the cost now, and less likely to buy if they have to pay 100 per cent of the cost now (plus surcharge), the surcharge may lead to more informed spending decisions.
As with many other strands of the BNPL debate, it’s tough to apply one blanket opinion when users of BNPL are often scattered across vastly different situations.
For those using BNPL as a temporary solution to pay for real necessities, whacking on a surcharge naturally feels like yet another kick in the teeth for those experiencing cash flow difficulty.
But in sectors where BNPL usage is high, like fashion retail, non-essential purchases are common.
In these cases, the opportunity to make BNPL a less attractive payment option certainly piques my interest.