IS THE RBA ABOUT TO BLEND THE BATTLE FOR LOWER MERCHANT FEES WITH ITS WAR ON INFLATION?

Commentary by George Lekakis, Senior Banking and Financial Services Correspondent

“Given the RBA’s present priority on curbing retail inflation, an emerging question is whether Governor Michele Bullock will be looking to recast the battle over merchant fees as a macroeconomic concern.”

Australia’s major banks are prone to boasting about how their investments in new service channels have contributed to a more productive banking system and associated service improvements for business customers.

In the payments market, the banks point to their roll outs of digital innovations such as contactless debit and digital wallets as evidence of efficiency gains and service enhancements.

However, a case can be advanced that the pricing strategies of the banks in the payments market have actually undermined efficiency in the Australian economy by helping to magnify one of its biggest recent challenges – inflation.

While it is true that bank-led innovations widened payment choices for retailers and consumers in the last decade, the banks have also shown an unerring reluctance to share the cost savings of new service channels equitably across their merchant bases. 

Since 2018, the merchant service arms of the four major banks – CBA, NAB, ANZ and Westpac – have worked hard to preserve their annual merchant fee hauls by denying least cost routing services to small business customers. 

Least cost routing is a service that allows retailers and other merchants to decide which payments scheme can process contactless debit card transactions on instore sales.

It enables retailers to direct contactless debit card payments away from bank-selected platforms – Visa and Mastercard – that each charge higher average fees than eftpos Australia.

For many years, leading financial institutions such as the National Australia Bank, the country’s largest small business lender, have denied small retailers the opportunity to access least cost routing(LCR) by refusing to bundle the service as an option in standard merchant plans.

That was a remarkable effort on the part of NAB given that in 2018 it was the first major bank to pioneer LCR in Australia when it supported the rollout of the service to large retailers such as Chemist Warehouse and BP.

Today, only 52 per cent of NAB’s Australian merchant base has an opportunity to use least cost routing, even though some of the bank’s largest merchants have been harvesting big savings for years.

According to Reserve Bank data, the service is now enabled across all banks for around 70 per cent of merchants on in-store transactions.

While that might sound like a success story, small business groups are concerned that the benefits of least cost routing are not flowing through to independent retailers because the banks are still not passing on fee reductions.

One reason for that is the concerted push by banks in recent years to migrate merchants on standard plans to more complicated contracts that prescribe controversial “blended rates”.

Banks such as CBA are enabling LCR through so-called “blended pricing plans” where merchants pay a flat rate fee of 1.1 per cent for accepting debit and credit card payments.

CBA’s flat rate is a significant mark up for merchants on in-store debit transactions processed by Eftpos, which the RBA estimates cost banks only 0.32 per cent per transaction.

Although the ability for merchants to route debit transactions to Eftpos Australia might be offered through such plans, thousands of merchants are seeing no direct financial benefit in lower fees on any transactions because they are obliged to pay the inflated flat rate.

The Reserve Bank has signalled it will review the effectiveness of how LCR is being offered to merchants in a forthcoming review of the retail payments system.

In a potentially ominous flag for the major banks, the RBA’s Payments System Board indicated last month that it wants the cost savings associated with LCR to be passed through to merchants who use the service.

That is a significant development in the LCR debate because it puts the heat on the banks to defend why they charge small businesses more than three times the cost of delivering a contactless debit processing service.

There is an obvious connection between the cost of accepting payments in the wider economy because if the rates at which the fees are levied remain static or rise they can have a magnifying effect on retail price inflation.

Bank fees on card transactions are calculated as a percentage of the price of goods and services sold by a merchant.

As the price of products increases the dollar value of the fees collected by the banks also increases.

The inflationary impact of merchant fees has become a focus of regulators in other countries such as the United States where last month the Visa payments scheme was alleged by the Department of Justice to be enjoying operating margins as high as 83 per cent.

US Attorney General Merrick Garland argues that Visa has “unlawfully” amassed the power to extract fees that far exceed what it could charge in a competitive market.

“Merchants and banks pass along those costs to consumers, either by raising prices or reducing quality or service.

“As a result, Visa’s unlawful conduct affects not just the price of one thing – but the price of nearly everything.”

Australian consumers also wear the burden of merchant fees because retailers and other merchants generally retrieve their processing costs through surcharging.

Given the RBA’s present priority on curbing retail inflation, an emerging question is whether Governor Michele Bullock will be looking to recast the battle over merchant fees as a macroeconomic concern.