Australia's central bank tells firms to drop surcharge ban

Australia's central bank said buy now, pay later (BNPL) firms will no longer be able to prohibit merchants from passing on surcharges for their services, robbing the fast-growing sector of one of its key advantages.

Following a two-year review, the Reserve Bank of Australia said on Friday it was now engaging with Treasury on "regulatory approaches" to enforce its decision - a move fiercely opposed by the industry.

The central bank noted BNPL services tend to be quite expensive for merchants to accept and it "has now concluded that there is a public interest case for BNPL providers to remove their no-surcharge rules."

Australia is home to some of the world's biggest BNPL firms including Afterpay Ltd, which this year agreed to be bought by Square Inc for $29 billion. Afterpay's shares were slightly lower in Friday trade while shares of rivals Zip Co Ltd  and Sezzle Inc fell 1.8 per cent and 0.7 per cent respectively.

Analysts at Bernstein and UBS said the RBA's new position was likely to affect Afterpay the most, given its reliance on high merchant fees to fund its business model. UBS also said there was a "strong risk" that overseas regulators could impose similar restrictions on the BNPL industry.

Matthew Wilson, an analyst at Evans and Partners Ltd, said the changes would be a "minor issue" for Afterpay because its platform was already entrenched in Australia and valued among merchants.