How to save yourself from the tap and go rip-off
Innovation is meant to make everything easier and cheaper and there is little doubt that tap and go payments have done the first bit very nicely.
More than half of all in person transactions are now tap and go with people voting with their cards and phones for the convenience of a rapid green tick.
Using cash for transactions has moved from 26% to just 13% over the past three years, although with surcharges for using tap and go becoming more common, there has been some blowback by consumers who are reverting to using cash in some cases to avoid fees.
What remains to be seen is whether tap and go can be made as cheap as it is convenient and the evidence so far is that it is certainly not.
Wallets, banks and card companies keeping costs high
The problem is two-fold because the fees electronic wallet providers such as Apple and Google charge banks to use their services are hidden and considerable, with suggestions of $100 million a year not being contested.
We have covered that issue at length here and we are now sure to see some action on that front after Treasurer Jim Chalmers agreed to give the Reserve Bank extra powers to intervene in the electronic wallet part of the payments space.
Both Apple and Google are saying they are willing to be part of that conversation, which probably means we can chalk in some cheaper wallet fees at some time in the future, although both companies will be keen to keep tight control of the near field communication part of their service for “security”.
The other issue is that the consumer has limited power to direct their payment to the cheapest option, which in Australia is usually EFTPOS, which usually requires you insert your card and select “savings” rather than tap and go.
However, there are now some EFTPOS solutions that can be added to tap and go.
Cheaper option often not selected
There have even been some claims that banks are making windfall gains by processing tap-and-go credit or debit card purchases through the highest fee method and even at times as international credit card transactions.
When a customer uses tap and go, banks charge a merchant fee that ranges from 1.1% to 2% of the purchase price, with the maximum fee for EFTPOS much cheaper at just 0.5%.
That fee is recovered by the business either by raising prices for all customers or by charging a surcharge which passes on its cost of providing the service to the customer.
With inflation driving prices higher and high interest rates causing families to watch their budget very carefully, the more common use of surcharges is starting to cause a bit of a consumer revolt and anecdotally increasing the use of cash by some consumers.
Greater consumer knowledge about whether they have a card with the EFTPOS logo on the back and are willing to demand that the transaction be charged through the EFTPOS system might also start to have an impact of saving money on some transactions.
That is particularly the case for smaller businesses which are charged more by banks for providing tap and go facilities than the larger retailers – a situation the RBA is not happy about.
Small business lobby groups including the Council of Small Business have been pushing for payment terminals to be set to automatically select the cheapest routing option, even if that means the banks need to update their payment terminals.
PayTo will make things interesting
As you would expect when there is some serious cash being paid from retailers to banks, the retailers are not happy and at least in the case of Woolworths (ASX: WOW), it is taking some interesting action.
Woolworths is planning to start moving payments on to Australia’s real-time payments system as a cheaper alternative to the card networks controlled by Visa and Mastercard via the banks.
The change is designed to reduce fraud and also drive customers to use its own digital wallet and rewards program.
Under the changes the supermarket chain will later this year offer customers an option to link their bank account directly to its app, using the PayTo functionality introduced by Australia’s new payments platform that has been built by the banks and is operated by Australian Payments Plus.
Woolworths customers will then have the choice of paying directly with a bank account rather than a debit or credit card, reducing payment costs.
Cashflow benefits for business
There are some very distinct positives for Woolworths of the new system because it would get the cashflow benefit of receiving funds instantly, rather than waiting for a day for settlement through the card schemes.
PayTo costs are expected to be similar to EFTPOS and the use of it is likely to grow among other large retailers and billers such as power and gas companies.
PayTo is expected to build up slowly on the consumer side but if Woolworths customers start to use it instead of cards in their rewards wallet, then it might well play a part in bringing costs down and finally start to bring the costs of tap and go transaction costs down more widely.