Small businesses from pubs and cafes to convenience stores have joined calls for the Reserve Bank of Australia to rethink its ban on card surcharges, fearing that the fees they pay to banks will stay the same and crimp their margins.
After the big banks threatened to jack up credit card fees and rates and restrict access to interest-free periods in response to the RBA’s proposals, a broad range of retailer groups told the central bank on Tuesday that its plans did not go far enough.
They expressed concerns about being saddled with high payment costs that they could no longer pass on, forcing them to lift prices or take a hit to profits.
Small businesses are worried that the government’s surcharge ban will leave them with bloated payment costs and erode their margins. Louie Douvis
“If the RBA bends to the banks and limits surcharging without fixing merchant fees, it will be the biggest own goal in the history of the payments industry,” said Wes Lambert, chief executive of the Australian Restaurant & Cafe Association (ARCA), which represents thousands of hospitality businesses.
“Our members would face higher costs with no way to recover them, and ultimately, it’s small businesses and consumers who lose.”
The RBA insists that its plan to lower the fees merchants pay credit card issuers will reduce the costs for businesses and support the surcharge ban.
But several submissions to the central bank say that big banks and global payment companies are unlikely to pass on the lower wholesale costs to customers.
As evidence, they point to the existing policy designed to send payments through the lowest-cost network available – often eftpos rather than Visa and Mastercard – known as least-cost routing.
However, several submissions say this has been turned on its head to support bank and tech profits.
That is due to the growing popularity of blended pricing plans, introduced by Square in 2016 and followed by the big banks.
The RBA noted that about 39 per cent of merchants were on such a pricing plan last year.
The blended pricing plan means the retailers pay the same fixed fee, based on a percentage of the sale, regardless of the card used or the network the transaction makes use of to clear.
But retailers being charged a fixed rate of 1.6 per cent of sales would be paying far more than the wholesale cost of a few cents; the payments company pockets the difference.
Government’s threat of ‘direct intervention’
In 2023, the Albanese government said lowering transaction costs for small businesses through least-cost routing was “a national priority”, and the government threatened “direct intervention” if the market did not deliver.
“The time for that intervention is now,” the Australian Association of Convenience Stores said in its submission.
It represents 7000 convenience and petrol-convenience outlets.
“Too often, merchants are pushed into blended rates that hide the true cost of each transaction, while routing decisions are controlled by acquirers rather than merchants.”
The RBA has reported that more than 80 per cent of merchants had least-cost routing enabled for in-person transactions as of June, but “scratch a bit deeper and all is not as rosy as it seems,” said Stephen Ferguson, chief executive of the Australian Hotels Association, which represents pubs.
“While payment service providers may have enabled least-cost routing, the merchants and their customers are not the ones receiving the benefit of the least cost.
This is because … providers are pocketing the margin.”
ARCA’s Lambert said: “For the RBA to prioritise bank profits over fair, transparent payment costs would be an insult to every cafe owner serving your morning coffee and every restaurant putting food on your table.”
Cafes in Australia operate on a 3.3 per cent profit margin, so a 1.4 per cent blended fee absorbed by the small business would reduce the profit margin on a cup of coffee by 42 per cent, according to data presented to the RBA by the Independent Payments Forum, which advises business groups on payments issues.
In its consultation paper in July, the RBA recognised arguments from the banks that their systems did not support dynamic least-cost routing and that significant investment would be required to upgrade them to do so.
But “a cynic would suggest that, of course, the invisible middlemen would say that,” the AHA said. “Dynamic least-cost routing would erode their margins.”
Companies such as Dutch payment giant Adyen and IPSI, a local start-up, say they can implement dynamic least-cost routing with current technology that delivers savings of between 45 per cent and 70 per cent compared with current blended rates.
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