The Zip Co Ltd (ASX: Z1P) share price fell to a 10-month low this morning as a threat to its business model looms large.
Shares in the buy now, pay later (BNPL) company slipped 0.5% to $6.17 in morning trade when the S&P/ASX 200 Index (Index:^AXJO) gained 0.5%.
At least the decline isn't as bad as its bigger rival. The Afterpay Ltd (ASX: APT) share price tumbled 4.3% to $119.10 at the time of writing.
Shine comes off Zip share price
The prospect of rising interest rates has taken the gloss off tech shares. But there's another big risk factor to the Zip share price and to the sector.
This threat comes in the form of a surcharge. The Reserve Bank of Australia (RBA) recommended that BNPL companies cannot stop merchants from passing the cost of using such services to consumers.
Big risk to BNPL shares
UBS undertook a survey and most consumers said they would not use BNPL if they were slugged with extra fees. And who can blame them as the fees could be pretty high.
"71% of Afterpay's customers surveyed agreed that they would not use it if charged a 4% fee, only 10% would (19% neither agreed nor disagreed)," said UBS.
"Users of BNPL services were generally unaware of BNPL's cost to merchants: once made aware, 30% stated they would not use BNPL at small businesses and 23% at large businesses."
Regulatory risk hangs over the Zip share price
The silver-lining here is that the fee-passthrough is only relevant in Australia. Both Zip and Afterpay are banking on the US and Europe for most of their growth.
On the flipside, one can't rule out other jurisdictions making similar rules about fees. One has to wonder if consumers in other countries have a strong distaste for fees as we Aussies.
While it is too early to panic, ASX investors should be watching the regulatory risks closely as this can have a big impact on the Zip share price and Afterpay share price.
Strong consumer awareness
Another saving grace is that consumer awareness for BNPL services is very high. UBS' survey found that 88% of non-BNPL consumers have heard of the service in 2021. This compares to 2019 when only 79% of this group were aware and 2020 when 85% knew what BNPL was.
And if you were wondering which BNPL company had the highest mindshare, this would be Afterpay. Around 91% of non-users recognised the Afterpay brand.
This compares with 55% for Zip, 18% for Klarna and 17% for Humm Group Ltd (ASX: HUM).
Higher risk and lower profit
"The survey again indicates a bifurcation of BNPL customers like a credit card book, i.e, a portion of low risk, affluent users, and a riskier portion that use it as credit," said UBS.
"We therefore see a risk 'free-riders' may use BNPL less if surcharged, causing adverse customer selection (higher credit risks) and lower sales volumes for BNPL businesses."
UBS has a "sell" recommendation on the Zip share price and "neutral" on the Afterpay share price.
