RBA set to go into battle to prevent excessive card payment surcharges
A battle of the financial heavyweights is coming into the final round and all consumers who pay surcharges on payments have a vital interest in the outcome.
On one side is the Reserve Bank of Australia, which has been patiently waiting for banks, card companies and business owners to move towards a system that minimises the amount of surcharges consumers pay when they tap or swipe their cards for payments.
On the other side are those banks, card and payment companies and, indirectly, the businesses that pass on the surcharges which are around $1 billion a year.
RBA holds a big stick but will move carefully
On paper, the RBA holds all of the cards for this fight being the authority with direct regulatory control of the payments system – no matter whether it is cash, cards or electronic methods.
However, there are lots of nuances in this fight which is why the RBA has been hesitant to act until now, allowing the industry to innovate and try to introduce a system of least cost routing for the plethora of payment systems.
The rough deadline for that review in the middle of this year is quickly approaching and it now seems likely that the RBA will take some sort of enforcement action to ensure that least cost routing will become almost ubiquitous rather than being less common.
At the moment the RBA rules are that businesses should only add surcharges that reflect the cost of the payment to the business.
Payment systems taking advantage of flexibility
That has proved to be a fairly flexible system, with businesses charging a wide variety of surcharges, usually as a percentage of the payment.
The actual fees faced by businesses differ according to the payment system they use and to how it is processed, with the eftpos system widely seen as the cheapest by a long way.
The banks, payments processing companies and card companies have used the existing rules to effectively “slice the salami” and take advantage of the surcharges to further their own aims.
The most likely outcome will be that the RBA will force least cost routing through payment systems over time to try to reduce the amount of surcharges paid by consumers, given that the RBA aim to have 80% of payments going through least cost routing is nowhere near to being achieved.
Instead, only around 64% of business terminals are equipped with lowest cost routing and the uptake of the feature which should put downwards price pressure on surcharges is disappointingly low.
Competition not working fast enough
Competition doesn’t seem to be working fast enough and there are too many examples of payments being forced through higher cost channels which supports higher flat percentage surcharges.
Complicating the issue is the fact that different card systems cost different amounts, with some premium credit and charge cards costing the merchant as much as $1.50 per transaction while debit cards run through eftpos are closer to 50c a transaction.
In general terms, according to an RBA report, an eftpos transaction costs an average business 30c for a $100 purchase, or 0.3%, while that cost rises to about 0.5% for Visa and Mastercard debit transactions.
Mastercard and Visa credit card transactions cost 0.9% while American Express and Diners Club cards are the most expensive networks with an average cost of around 1.3% and 1.7%.
Credit cards being cross subsidised
By charging a flat percentage surcharge, businesses are effectively cross-subsidising the expensive credit and charge card customers and penalising those using debit cards.
Of course, charging a percentage surcharge rather than a flat transaction fee also makes the job of working out if a business is passing on the actual cost of each payment very difficult and it is fairly obvious that some businesses have been taking advantage and charging more than they should have.
For instance, does it really make sense for a business to charge a $20 surcharge for a single payment for a restaurant meal consumed by a large group?
Is that really the cost of processing that single transaction? – it seems highly unlikely and even less likely if the payment method is a debit card processed by eftpos.
Surcharges banned in many countries
In many countries such as the UK and the European Union, card surcharges are actually banned but that sort of regulatory action is unlikely at this stage.
The card surcharges are also part of the vigorous debate around the future of cash, particularly given the fact that the use of cash is rapidly dwindling and the economics of transporting it are very troubling.
There is a good chance that using cash will become less of an option over time as the usage continues to fall and some businesses are already discouraging the use of cash due to the cost of labour and security.
Consumers often not given a choice of payment method
Consumers also are not often given the chance of choosing which payment system a business uses, given that many debit cards – which are the most frequently used payment card in Australia – are dual network, with a Mastercard or Visa logo on the front and an eftpos logo on the back.
In some cases they may be able to choose to use eftpos and be rewarded by no surcharge – Aldi is one retailer that allows this – but it involves inserting or swiping the card rather than using the more convenient tap and go system.
Often tapping rather than inserting or swiping automatically routs the transaction through the more expensive Mastercard or Visa network.
Consumers are also paying for the payment systems in a much more opaque way with many of the larger department stores and supermarkets not charging surcharges but instead pushing the cost of running their payments through to their product prices.
The banks and payment companies such as Tyro (ASX: TYR) and Square say that it is up to businesses to choose the processing package that suits them and point out that these packages – which include things such as terminal rental, software and other services – are about more than just payments.
However, the RBA has given plenty of notice that it is concerned about the way surcharging has grown through the payments system and it should not come as a surprise if it mandates least cost routing as a bare minimum, despite the protests that will bring.
When it comes to charging fees, it seems that regulators need to act to drag banks and payment companies into line.
Leaving them to their own devices has resulted in a payments system that is difficult and expensive for consumers to navigate and which generally doesn’t reward those using the lowest cost eftpos transactions.