How Australia’s banks and card payment systems are slicing the salami

Sometimes imitation is the best form of flattery but problems arise when real life banks and card payment systems copy the very people who have tried to scam them.

It is happening right before our eyes here in Australia as the big banks and card payment systems effectively copy a fraud which is known as “salami slicing” to get their hands on what we might regard as a few extra cents every now and then but which turns into more than a billion dollars when you add it all up.

The whole idea of “salami slicing” is that you steal large amounts of money in many small, undetectable amounts so that you effectively get away with the theft.

Stealing test deposits leads to jail

One of the earliest examples of a real life “salami slicing” scam that actually worked involved a US man called Michael Largent who wrote an ingenious computer program that stole small test deposits made by online brokerages into new accounts.

He eventually went to jail for the scam, paid restitution and was banned from the internet and computers for three years after his release but effectively a variation of his scheme is now being used in a widespread way right here in Australia.

Largent’s computer program opened more than 58,000 brokerage accounts and then stole the micro deposits made by the financial institutions to link the new account to an existing bank account.

After the deposits were made, he transferred the money into his own bank account or on to prepaid debit cards.

Banks and payments companies copy the scam

In many ways the scam is almost indistinguishable from the way the current system of payment surcharges are operating around Australia – a system that grew wildly when cash use was discouraged during Covid and which has continued to snowball since.

The payments scam even hits those who do pay cash because many of the big supermarkets and other stores have internalised the charges made by the payments system directly into all of their retail prices.

Aldi is one exception because it uses surcharges but allows customers to avoid them by using eftpos if they can, although this can make the transaction more cumbersome – think insert card and enter a code rather than tap and go.

Regulation is finally catching up on the scam

Across Australia the cost of the fees charged by banks and payment terminal companies is at least $1 billion a year and is so large that the Reserve Bank governor Michele Bullock has warned the payments industry that regulation is coming soon to force it to cut processing costs and pass the savings on to merchants and customers.

The competition regulator, the ACCC, has also taken legal action against credit card giant MasterCard, accusing it of deliberately pumping up costs by getting big retailers to use its network instead of cheaper processing methods such as eftpos.

In general terms the cost of payments on an average eftpos transaction of $100 is around 28c or 0.28%, according to RBA figures.

For all other forms of payment the cost is significantly more, ranging from around 50c for a Visa or Mastercard debit card to about $1.30 for a credit card and right up to around $1.50 for charge cards such as American Express or Diners Club.

So, if a merchant charges a flat 1.75% on a large transaction, that is quite a slice of the salami that is being effectively scammed from the customer, particularly if they are being charged through the eftpos system.

Adding insult to injury, as appreciation grew that the surcharges are often not noticed by customers, some businesses have now built all sorts of other surcharges into the mix such as public holiday or weekend surcharges.

Again, although the customer might have noticed a sign on a menu or near the cash register warning about various surcharges, they are unlikely to take too much notice of it and are not really in a position not to pay the surcharge once it has been added on and put through.

Banks getting gap payments

The banks make good money from the payments due to the gap between the wholesale amount charged for eftpos transactions which represent around 75% of all card purchases and the fees they charge to merchants such as shops, restaurants, cafes and pubs.

In this way the banks are effectively gouging the merchants who are passing costs on to customers, although arguably the banks themselves are also being gouged by companies such as Apple and Google who are charging large amounts for the use of their near field communications payment systems in mobile phones to facilitate tap and go.

The salami slice problem is particularly noticeable among small and medium sized merchants which are unlikely to get the sort of discount rates given to large supermarket chains by the banks and card companies.

If they use a company such as Jack Dorsey’s Square to process their transactions, they are charged a flat rate of 1.6% of the purchase price, or $1.60 on a $100 buy.

In this way not only is the salami being sliced but the customers making “cheap” eftpos transactions are effectively cross subsidising other customers who are making much more expensive credit and charge card transactions.

RBA figures show that on average, Visa and MasterCard transactions cost 0.84%, American Express costs 1.38% and Diners Card costs 2.11%.

The amount obviously changes according to the size of the bill.

It is a big salami that is being sliced too, with RBA data showing that Australians make about $556 billion of purchases a year using debit cards and $377 million a year using credit cards.

These amounts totally dwarf the amount of cash used for purchases.

Least cost routing will slash costs

The size of the costs incurred in slicing that salami could be reduced considerably if the payments industry was forced to use a system called “least cost routing”, which as the name suggests would automatically push payments through the cheapest system available – most likely eftpos.

RBA Governor Michele Bullock is widely tipped to implement least cost routing this year as part of the ongoing reform of the regulation of the payments system.

That reform alone would radically reduce the size of the salami slices being charged, with Ms Bullock saying she wants to see lowest cost routing used by more than 80% of merchants, well above the current 54%.

There are likely to be other changes coming too, which can’t come soon enough given the speed at which payment system surcharges seem to be growing.

Another reform could be to give more power and education for consumers in how their payment is processed, with the ability to save money by using lower cost methods.

Whether Ms Bullock can remove the salami scam entirely from our payments system remains to be seen but it would be an important reform to get right, given the mushrooming size of the problem.

One of the great attractions of shopping in Australia has always been that the price on the price sticker is the price you pay at the register with no additions for things like GST.

It would be an enduring shame if the growing salami scam was allowed to ruin our system of all-inclusive pricing for all time.