Ben Zyl, CEO and Co-founder, Waave
Businesses across Australia are collectively paying close to $3billion in merchant fees. Three billion, just to be able to transact with their customers.
Not surprisingly, this very big pie is eaten up by card schemes (Visa, Mastercard), the banks and a handful of other payment methods.
With many businesses, particularly retailers, doing it tough, these fees are enough to tip them over the edge. It isn’t sustainable, nor is it fair for consumers, who often end up footing the bill in the form of payment surcharges or higher prices for goods and services. Payments are part of the price of doing business, but with cash in fast decline, the increased share of cards means the overall cost of payments has risen, and no one can afford this much in fees.
This year the Federal Government announced it was rolling out a new approach to digital payments, which included pushing Least-Cost Routing as a way for businesses to use the lowest-cost payment method to receive money. An RBA conclusions paper released this month said that if providers do not make substantial progress in enabling LCR for more merchants by June 2024, the Bank will explore imposing a formal regulatory requirement on providers to enable LCR for their merchants.
The fact is, least-cost routing is a flawed strategy.
Why Least Cost Routing is pointless
Most debit cards issued in Australia operate on a dual-network - either Visa/Mastercard as route 1, or EFTPOS (which is part owned by Woolworths, Coles and Banks, ahem) as route 2. Visa/Mastercard is normally the default when a card is tapped, either with the physical card or mobile, and if these schemes are the cheapest then the transaction will be processed by them. However, if the cheaper route is EFTPOS then that is when LCR will kick in and change the route.
Ironically, the technology and regulation already exists to reduce the cost of payments without touting least-cost routing; the only thing holding us back is that everyone is in bed with each other - the banks and international card companies. They have all developed ways to get around it. How?
Banks do this on the consumer end, by offering people ‘upgraded’ card types that automatically charge the merchant more where the benefit may only be the colour and name of the card; for example, ‘Platinum Debit Card’.
Visa and Mastercard also offer huge sweeteners to large enterprise businesses (like supermarkets) - they cut a deal on reduced fees to ensure payments are routed through them. This is not an option for small businesses, however, who just pay the higher fee because they need to offer consumers a choice.
There’s also the problem of ApplePay/GooglePay, now used prolifically. They add another surcharge component for each transaction, and mask the type of card that’s being used. There, it’s on the consumer to select debit within their wallet, but most people have no idea about this, so it defaults via Visa or Mastercard anyway. New payment providers like Waave are locked out of these wallets because we use Open Banking to communicate directly with a customer’s bank, not with Visa or Mastercard. Because they only deal with the major card schemes, it’s a monopoly.
Fee setting is also flawed. The RBA has said that businesses need to charge the exact fee, or the lowest fee, when they introduce a surcharge to cover their costs. To get around this, the provider of the terminal service makes it one flat (higher) fee to cover everything. If they tell the merchant each transaction is at 1.5%, this is what they pay (and therefore pass on as a surcharge to the consumer).
What’s the solution?
Instead of least-cost routing, the RBA should mandate that surcharges be shown on the terminal for every transaction before a customer taps. This gives consumers a choice to select the cheaper option, and we need to keep educating consumers about surcharges so they can make informed decisions.
It should also be clear to the customer if the merchant is charging a flat fee, and what percentage of the transaction this is. Consumer backlash will pressure terminal providers to stop charging flat fees.
Digital wallets need to be regulated to enable payment networks such as Waave to be added. Consumers want the convenience, but it can’t remain a monopoly that is robbing businesses of their already tight margins.
The other major change that will happen, but needs to hurry along, is through Open Banking. The banks like to talk about this but in reality they were dragged to the table because they are fond of their fees and payment kickbacks.
Open Banking allows new payment offerings like Waave to completely cut out card schemes and give customers an option to use their own funds rather than a back end labyrinth of fees and surcharges. Open Banking is available now and supports all Australian banks.
Australia’s new Consumer Data Right legislation makes this possible, putting consumers in control of who they share their data with, for their benefit. Unfortunately the language used around CDR by the banks is fear mongering, warning consumers about the dangers of sharing their data. In reality, CDR is far more secure than paying with a credit card, and needs to be recognised as the gold standard for security. It should be promoted in the same light as the Heart Tick endorsement to reassure consumers that their data won’t be misused or sold, and is there to give them a smarter choice.
Our current payment system uses distribution channels that everyone has accepted for aeons. Cards are in the middle and both sides (businesses and banks) are still playing by their rules. Consumers have every right to expect digital convenience, but it needn’t cost our economy billions each year, or their hip pockets. We need to stop being wasteful and explore solutions from a variety of voices, not just those profiting off the status quo.