After generations of Australian central bankers fought the good fight to attain a large degree of independence and a reputation for integrity, it is sad to see the RBA forsake its principles under a whiff of political pressure.
On Friday – the traditional day for ‘taking out the garbage’ – the RBA went with the political flow and quietly confirmed it will continue to protect the multi billion-dollar, buy-now-pay-later (BNPL) industry from competitive neutrality.
If it’s a choice between Afterpay, the $27-billion stock market darling, and small merchants being slugged 6 per cent. The Reserve Bank of Australia stands with Afterpay and its BNPL peers – peers that include the Commonwealth Bank of Australia.
Friday’s “preliminary conclusions” consultation paper made official the backflip signalled by Governor Philip Lowe in December, when he set out the case for the RBA’s previous stance of allowing merchants to levy a surcharge to cover hefty BNPL fees, but then decided the BNPL impact wasn’t bad enough yet to require action.
So in the RBA’s eyes, lying credit companies are now allowed to get away with rorting the payments system as long as the rort doesn’t grow too large – without defining how large is too large.
Small crash, not many hurt
As long as the bus crash is small and not too many are injured, the RBA is OK with the bus being driven without brakes.
And Afterpay and its peers do lie – they claim not to be credit providers.
Pull the other one.
It’s a blatant ruse that has allowed Afterpay and friends to avoid the regulatory controls and checks that other credit providers have to operate under.
When ASIC also sniffed the political wind and rolled over for BNPL in November, Financial Counselling Australia CEO Fiona Guthrie told The New Daily: “If it looks like a duck, and quacks like a duck, it is a duck. BNPL is credit and should be regulated like other credit products.”
As reported here at the time, ASIC and the RBA going soft on BNPL is a feather in the cap for the government wanting less regulation of the for-profit finance sector – a push led by Treasurer Josh Frydenberg and fintech cheerleader Senator Andrew Bragg.
The ruse is so good, the CBA is investing in BNPL itself. As CEO Matt Comyn told a parliamentary committee, “avoiding all of that regulation is quite a feat”.
BNPL political muscle has allowed it to get away with that old furphy of “light-touch regulation”, an industry code. Companies that contravene the code might be “named and shamed” – a practice somewhere between being savaged by a dead sheep and tickled with a feather.
The ducks claiming to be cats to skirt around credit regulation is an issue that will end up biting the proportion of mainly-young BNPL customers who have trouble handling credit, something that worries consumer groups.
What’s concerning about the RBA abandoning the sanctity of competitive neutrality – the case for which was very solidly made back in November 2019 – is that it’s a chink in our central bank’s integrity. Some might argue it’s another chink.
Competitive neutrality was a key plank of the 1981 Campbell committee review of our financial system, a review that revolutionised Australian finance.
Market-based reform quickly goes astray without such a principle.
Standing over shopkeepers
But you don’t have to be a student of finance history to understand what’s crook about the RBA continuing to allow BNPL companies to restrict merchants’ freedom to trade as they might reasonably wish.
I’d back the pub test in seeing there’s something wrong with BNPL outfits being permitted to stand over shopkeepers.
Credit card companies used to do it – forbid merchants from passing on the cost of the card if they wished – but were stopped by the RBA. It was wrong.
BNPL companies charge merchants much, much more than credit card companies – as much as 6 per cent. The RBA says that is not wrong.
Meanwhile the BNPL mob will continue to get away with claiming their product is “free”. It’s not.
It’s certainly not free for anyone who misses a payment, and it’s not for the rest of us who don’t use the product – we are effectively forced to subsidise those who do.
Friday’s RBA statement seemed tinged with regret, or at least a wistful hopefulness, while claiming BNPL is too small to worry about yet.
“However, the arguments are finely balanced and a public policy case could emerge in the future if BNPL continues to grow strongly and becomes an even more prominent part of the retail payments landscape,” the mandarins concluded.
“The Board will therefore keep this policy issue under review in light of market developments.”
In other words, the board is waiting for the bolted horse to send a postcard from a further field. Or perhaps it is waiting for a different political wind.