Debit and credit card surcharges have turned into an unexpected goldmine for the payments industry, much to the detriment of Australian consumers. What once seemed like a straightforward alternative to cash has spiraled into a tangle of fees, leaving many puzzled and paying more than they should. Amidst the intensifying cost-of-living crisis, the Reserve Bank of Australia (RBA) is accelerating its review to address these surging costs.
Brad Kelly, co-founder of the Independent Payments Forum, offers a blunt assessment: “The payments system is deliberately opaque and complicated because where that exists there is money.” While debit cards were once the cheaper choice, this is not reflected in the current charges imposed on merchants and consumers.
Reform advocates are pushing to slash the annual $6.9 billion card fees collected by banks, platforms, and card companies, aiming to assist small businesses and their clients. Payments industry representatives counter that cash transactions are costlier for businesses and that fees cover essential infrastructure, network services, and fraud prevention.
Historically, debit cards were presented as a safer option compared to credit cards, which in the 1990s gained a reputation for leading users into debt. Initially dependent on the domestic Eftpos system, debit cards evolved with Visa and Mastercard’s entry via Australia’s major banks in 2005, leveraging tap-and-go technology. This sparked a surge in debit card usage, sidelining cash transactions.
Each card tap triggers a series of fees that compensate various financial entities, including banks, payment platforms like Square or Tyro, and card networks. Large retailers, able to negotiate cheaper rates, typically absorb these costs, sparing customers from surcharges. However, smaller businesses often pass these costs onto customers due to significant transaction expenses.
From the consumer perspective, it appears that small businesses are raking in fees. In reality, the money splits among banks, payment platforms, and card companies. Kelly points out that major retailers benefit from advantageous deals while small businesses face steeper rates. The transaction cost can range from less than 0.2% to over 2% of the transaction value, with Eftpos being the cheapest option followed by debit systems like Visa and Mastercard. Credit cards, offering points and rewards, incur the highest fees.
The real trouble began when consumers noticed hefty charges despite using debit cards. This stems from “fixed,” “blended,” or “bundled” payment plans where customers incur a flat surcharge regardless of their card type. Warwick Ponder of the Independent Payments Forum illustrates the inequity: “That Amex user standing next to you in the line should lean over and tap you on the shoulder and thank you for subsidizing their next trip to Thailand.” This system forces debit card users, particularly younger ones, to subsidize high-cost credit card users.
The blended model contradicts the RBA-promoted “least cost routing” policy intended to channel transactions via the cheapest network, typically Eftpos. Banking lobbyists argue merchants should choose their payment schemes, noting some businesses prefer fixed-price bundles for their predictability. Mark McKenzie of the Australasian Convenience and Petroleum Marketers Association criticizes the convoluted fee structures, which can mislead small retailers into disadvantageous agreements.
During a recent parliamentary inquiry, National Australia Bank’s chief executive, Andrew Irvine, highlighted the inconsistency and lack of transparency in surcharges, recounting a personal experience of paying an “outrageous” 10% surcharge on a coffee. While some banking sector members advocate for a surcharge ban, small businesses argue that this would favor large companies with negotiated discounts. Reformers call for authentic “least cost routing” across all platforms, the prohibition of blended packages, and greater fee transparency.
McKenzie insists on the need for a more transparent payment system, suggesting that while banks deserve fair returns, products must be designed for easy comparison by merchants. He underscores that the current lack of transparency undermines the market’s integrity.
As Australians buckle under the weight of surcharges, clarity and fairness in the payment system have become crucial. Both small businesses and consumers stand to benefit from a more transparent, equitable fee structure. The Reserve Bank of Australia’s impending review and potential reforms could pave the way for a more balanced and just financial landscape.
Source: Theguardian