By Stuart Condie

SYDNEY--Australia's central bank wants buy-now-pay-later platforms to scrap contract terms that prevent merchants from passing on the cost of using their service to consumers.

The Reserve Bank of Australia on Friday said its payments system board believes it would be in the public interest for installment payment providers, which include Afterpay Ltd. and Zip Co., to remove their so-called no-surcharge rules.

The rules prevent merchants from raising the cost of their goods or services to cover the slice of the transaction levied by buy-now-pay-later providers. Critics says this gives buy-now-pay-later providers an unfair advantage over other payment methods such as credit cards, the cost of which can be passed on in the form of a fee.

"BNPL services are often free or inexpensive for consumers to use if payments are made on time, but tend to be expensive for merchants to accept," the bank said.

The recommendation, which needs legislation to become enforceable, represents a reversal from the RBA's position last year, when it signaled that providers could maintain the status quo in the interest of encouraging competition in the payments industry.

Analysts say the no-surcharge rules have been a key component of the buy-now-pay-later industry's explosive growth. A 2020 survey by investment bank UBS Group AG suggested that 67% of Afterpay users wouldn't use the service if they were charged a 4% fee.

UBS on Friday said the RBA's stance increased the risk to Square Inc.'s US$29 billion acquisition of Afterpay. There is a strong risk that regulators in other countries could follow the RBA in imposing restrictions, it said.

"We see this as a materially negative development for Afterpay in particular given its reliance on high merchant fees to fund its economics," UBS analyst Tom Beadle said.

Shares in Afterpay, the 14th largest ASX-listed company by market capitalization, were 0.8% higher at A$127.39. Zip Co. shares were 0.4% lower at A$7.06.

Write to Stuart Condie at stuart.condie@wsj.com

(END) Dow Jones Newswires

10-22-21 0020ET