Getting more competition in the payments system

Some interesting reading in the Productivity Commission’s draft report regarding routing:

http://www.pc.gov.au/inquiries/current/financial-system/draft

The majority of retail payments in Australia are now made through non‑cash methods — Australia has the fourth highest number of non‑cash payments per person, the highest level of contactless card use in the world and digital payments are growing at an estimated 10% per year. The payment system is a part of the financial system that has attracted much fintech activity (in part because of the comparatively low start up requirements), including from major tech firms such as Apple and Google. 

Giving merchants a choice 

Card payment systems are dominated by the major banks (as the issuers of over 70% of Australia’s debit and credit cards), and the global card schemes, MasterCard and Visa (which enable over 80% of credit card payments). 

The larger banks also offer acquiring payments services to merchants, usually bundled with card acceptance facilities. This market is slightly less concentrated than the market for card issuers, with strong growth in recent years by institutions such as Cuscal, Tyro, Indue and Square, and a number of new entrants. 

The dominance of the major credit card schemes has been reinforced by developments such as ‘tap and go’ facility at point of sale, which defaults dual network card payments through the higher charge credit card route rather than the lower cost eftpos system. 

Because of the limited technology offered to merchants by banks, consumers and merchants in Australia have little practical choice about payment pathway at the point of sale. In many overseas countries, either the merchant or the card holder is given the choice of payment pathway for dual network cards. In the United States, for example, merchants are given scope to select from at least two payment pathways and change between these; in Malaysia, merchants have first choice of the default pathway but the customer can override it. The technology is readily available to offer dual payment choice in Australia and we consider this must now be mandated. 

The fees banks charge each other for card payments are passed on to merchants. These are, in turn, paid by consumers either as surcharges on particular purchases or more commonly in the case of smaller merchants, as higher prices overall. In practice, the fees also vary with the types of cards — a customer who pays with a premium credit card may cost the merchant a higher fee than a customer who pays with a basic ‘no frills’ card. To give merchants some control over their payments system costs, we consider that merchants should be given the capacity to select their own default route that is to be used for payments by dual network cards. 

Regulation of bank interchange fees and surcharging has proved complex and there is little genuine commercial justification for interchange fees. The Payments System Board of the RBA should ban, by mid-2019, all card interchange fees as a way to lower overall costs to users.