The Afterpay (ASX: APT) share price will be on watch this morning after defending itself against a suggestion of retailers being allowed to add surcharges to customers.

Afterpay Touch is the owner of the popular “buy now, pay later” app. As of mid 2019, Afterpay had over 5.2 million registered users worldwide, making it one of Australia’s true technology success stories.

Afterpay’s Surcharge Defence

The Reserve Bank of Australia (RBA) is going to conduct a review next year about surcharges and how retailers that use Afterpay are not allowed to pass those customers onto consumers.

But, there are suggestions from the RBA that merchants might be increasing their prices to mitigating the cost of providing the buy now, pay later service according to reporting by the Australian Financial Review.

However, CEO Anthony Eisen has recently spoken to the AFR to say that Afterpay is designed to generate business for retailers, it’s not just a payments service like credit or debit cards which are cheaper. Its cost should be compared to other marketing & advertising expenses.

Mr Eisen said: “In Australia we’re the biggest lead referrer to retailers online other than Google, although it does not release its statistics. Our fee is relatively small compared to other methods [of marketing], for example affiliate marketing where the cost of leads is 8 per cent to 12 per cent in some instances.”

To draw the linkage between Afterpay [and higher costs of goods] directly without looking at those cost channels is missing the point.”

One of the main pieces of evidence that Afterpay points to for its defence is that in October 2019 alone it generated 10 million lead referrals for merchants.

Mr Eisen continued, “Retailers have chosen Afterpay because we’re a more effective channel to customers. Millennials, for example, are a tough audience for retailers because they don’t respond to traditional advertising and you have to connect in different ways. If you look at the retailers, one of their biggest line items is marketing promotion. Much more of Afterpay’s service would be classified as marketing and promotion than mere transaction processing”

Investors will get to see the result of the RBA inquiry sometime in 2020 as the inquiry will start early in the year.

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At the time of publishing, Jaz does not have a financial interest in any of the companies mentioned.