Originally published in the Canberra Times.
By Bruce Billson.
No one is happy when you buy a coffee, a meal or even an item of furniture and as you tap your card a few extra cents or dollars are drained from your account.
Typically, a small business merchant is only passing on this surcharge because it is imposed upon them through our opaque and mysterious payments system with no help to their bottom-line.
Small businesses have such tight margins, and most are facing tough conditions that they cannot absorb this fee. In fact, 46 per cent of small businesses didn't make a profit in the most recent year of accounts.
Frustratingly, the bigger players such as supermarket giants and others have sweetheart deals where they only pay a fraction of the cost of smaller merchants and this is readily absorbed into the price of what you buy so it's never visible at the checkout.
Reserve Bank research reveals it is a very unfair system that punishes small businesses as they are paying three times more than big businesses in fees and charges for electronic, contactless, debit-card transactions, such as tap-and-go.
It also finds no evidence the processing costs are different due to the size of a business, so it is a deliberate decision to make small business pay more. This is outrageous.
Some research we commissioned in 2022 found these needlessly higher fees on small businesses are worth between $800 million and $1 billion a year. Other studies have similar findings.
In a cost-of-living crisis, that's $1 billion extra being gouged from consumers and small businesses and that's why we have been calling for a system called least-cost routing to be mandatory.
I'm delighted the Australian government has heard our call for the spotlight to be put on the payments system. It's a dark mystery to most people how these charges are arrived at.
As we move increasingly towards a cashless society, this cost burden on small business and consumers is only going to worsen unless action is taken.
When you tap-and-go, the payment technology automatically chooses the payment pathway.
It should choose the route that's the cheapest as that would be good for the consumer and the merchant, but most of the time that's not what happens.
Instead, it is being operated like a sat-nav company who also owns a toll road and sends all the traffic, regardless of destination, down the more expensive toll road route, with no care what is the fastest, cheapest or best way to go.
Thankfully, a Reserve Bank review is looking at all the players involved including the people that issue the cards, the banks that are involved, and the cost of making the transaction.
There's about a dozen or so large providers of payment services, but in the background, there are multiple payment channels. There are local services, such as eftpos. There's international services Visa and MasterCard and bespoke services like Diners and American Express.
And some businesses are now trying to bypass all of that. One chemist chain is urging customers to click on a QR code, so they effectively just do a direct transfer and cut out the middle people because of the cost.
Different payment platforms, cards and channels have different pricing arrangements. Sometimes transactions cost more because the card is part of a rewards scheme. When people use their phone to pay, the rules are different again.
And buying something on a website is called "card not present" because you punch in your numbers and there's multiple ways of how that operates as well.
Sometimes the merchant is encouraged by a service provider to bundle it all up and pay a fixed fee that might be 4 per cent on every transaction. But depending on the nature of those transactions, they might be paying way too much.
Some providers have been making good money in that fog by keeping the "clip in the middle", taking the difference between the actual cost and the fee charged. It's money for jam and the small business gets to pay.
For a corner store selling convenience goods and coffees, where the average sale might be $10, a percentage payment will be better. But for a furniture retailer, where some items sell for more than $1000, a percentage fee will be significant so a fixed price might be more attractive.
It varies based on transaction volume and amount, and that's why mandating least-cost routing is vital because it picks the lane that's most cost effective, and that's good for everybody.
It is very important there be transparency as well as improved affordability, for small business and consumers.
Least-cost routing would go a long way towards clearing away the fog and mean every time a debit card was used, those payments go down the cheapest channel. And that would take some pressure off the cost of receiving that payment, and therefore reduce the likelihood of surcharging.
But we need the banks to turn the system on. Fewer than half the terminals operated by the big four banks have been activated.
I'm delighted with the work the Reserve Bank is doing to shine a light on this often-mysterious part of our economy, and we have been working closely with them and others such as the Independent Payments Forum and MPs who want a better deal for small business.
While the Australian government flagged the option of a ban on surcharging from 2026, it was encouraging to see its repeated promises of safeguards to reduce the costs small businesses face when processing payments and to make sure there are no added costs or unintended consequences.
Financial Services Minister Stephen Jones pledged small businesses and consumers would get a fairer go, saying: "The surcharges pile up and punch a big hole in the wallets of customers and the takings of small businesses owners".
That's why getting this right really matters.
No one wants to pass on business costs that aren't justified. Small businesses want to be profitable, but when they've got these charging regimes for receiving a payment in a form other than cash, and the prices are steep in some areas, and the system is so confusing, they need help. And that's what we are working with the Reserve Bank to do.