TRANSCRIPT

Australian Small Business and Family Enterprise Ombudsman Bruce Billson interview with Leon Delaney.

Radio 2CC Canberra

Subject: payment surcharges and least-cost routing to reduce fees

Leon Delaney

When you're at the shops and making a payment with your card there's often a very annoying and frustrating surcharge that gets included. I know every time I get a pizza, there's like another 13 cents or something because I waved my card instead of paying cash. Which makes no sense to me because handling cash is actually more expensive than electronic transactions. But the question is more expensive for whom? Joining me now the Australian Small Business and Family Enterprise Ombudsman, Bruce Billson, good afternoon. 

Bruce Billson

Fab to be with you and your listeners on this glorious capital day. 

Leon Delaney

It's a lovely day, isn't it, and you've been writing today about these vexatious fees that we've all experienced. But unfortunately, there's actually more to the story than just a transaction fee. There's a variety of different fees in different circumstances, isn't there? 

Bruce Billson

It’s one of the great mysteries. If you're involved in trade and commerce, you look to understand what's going on and the impacts on your business. This is an area where there's so many players involved and a little clip here, a little clip there, you wonder just what you're being charged for. Interchange fees. You've got merchant service fees. Issuer scheme fees. Acquirer scheme fees. I mean all these are bundled together … and I imagine it's not you buying the pizza, you'd be too svelte to have pizza…

These fees have a number of different clips in them from a number of different players. And sadly, if you're a small business your capacity to negotiate a better deal is almost zero. My own agency's report suggests there's between $800 million and $1 billion a year in excessive fees. These are fees needlessly charged because the merchant, the business, doesn't have access to something called least-cost routing, which sends that payment down the channel that's most cost effective to the amount being sought. And that's what then puts pressure on that business, who are already struggling with margins and profitability. And that's why you see a number of merchants, as they are called in this in this discussion, pass them on to their customers.

Leon Delaney

Now, I mentioned a moment ago that it's actually less costly to handle cash than it is to use electronic transactions. That's mostly true, but not always, depending on the circumstances. But the point is that there's a difference between credit cards and debit cards. Now, if you're using a debit card and making an EFTPOS transaction, the bank will charge a small fee for that which the business then passes on. But for the bank to be charging the business that fee in the first place, in my belief, is not justified because it would be more expensive for the bank to be providing cash for the business to run their business, as has been evidenced by the problems with Armaguard and the cost of transporting notes and coins from point A to point B. Why are banks allowed to get away with that?

Bruce Billson

You're showing your great public policy perspicacity here Leon. You're delving deeply into those issues. The thing that I would suggest is at a macro level I'd say you're right. Banks and those involved in moving large volumes of cash, restocking ATM machines - there's an oxymoron, they’re either ATM or AT machines - that's a task. There's security involved. There’s large volumes. There's certain denominations, and away you go. For a small merchant, receiving cash doesn't trigger any of those immediate obligations, although many will have to take that down to the bank or they might simply add that to their till. So, it's not as immediately crisp for that small business as it is very clear, and you've outlined it, where there's larger amounts involved. 

There's also a bit of history here. When you pay cash, you expect what you’re paying is the sticker price. And the sticker price, ever since the GST was introduced, is the total cost of the goods plus tax. Where you're electing to make payment through some other channel other than cash, businesses can either absorb the cost, because there is a cost, or in some cases they can pass it on. And that cost varies greatly depending on the size of the business. They generally pay about three times the amount for exactly the same transaction than a big business. Now, how is that fair and reasonable? And then there's also the point you're making a difference between debit cards, credit cards, and scheme cards, like where you get extra rewards or benefits or other some kind of value that is perceived in using that card. 

Leon Delaney

This cost differential that you just highlighted was something I read about in your article today, and I was a little bit taken aback by that. The exact same process, the exact same service, will cost three times as much for a small business as it does for a large business, like a supermarket. That's just pure extortion, isn't it? Exploitation, extortion?

Bruce Billson

It’s ridiculous, and in my eyes completely unjustified. Elsewhere in the financial services system, like a fee that you charge to use an ATM, it's governed by what's the actual cost involved in that activity. Now here, it's exactly the same activity. No one can tell me your pizza paid for at a small merchant costs more in its transmission through that scheme that elaborate various steps that I just touched on the opening of the interview, than it would if it was a much larger business. 

Yet they have something that's called strategic rates. Strategic rates, I think, are actually a sweetheart deal with some of the major retailers in Australia that see these super cost-effective rates. And guess what, go to a supermarket you’re not hit with a surcharge. Well, you shouldn't be either because they're paying a fraction of what you’d be paying if you're going to a smaller business. And that's why it's so good that the RBA is looking at this issue, shining a light on it just to see what is going on here.

And there's also an issue with these moving parts. If you and I owned a toll road, and we also happen to own a sat-nav business, and it didn't matter whether I was going to Gungahlin or whether I was going to Hall, it always took me down the toll road. You kind of think that was a bit dodgy, wouldn't you, and a bit self-serving. Yet we see in some areas, these payments are routed down, not the best and most cost effective channel for you as a customer or you as a business, but the ones that the financial institution thinks is great. And that’s where there is also a need to really have a bright light on it, like a sunshiny day in Canberra.

Leon Delaney

The difference between debit cards and credit cards is, if you're using your credit card, Visa or MasterCard, or whichever provider it is naturally takes their fee as well. But years ago, that fee was considered to be a cost of doing business. It was just an overhead that businesses accepted because they thought that offering the use of credit cards was a convenience that would attract more customers to them. So, it was a cost they were prepared to wear. Not anymore. We have to, we have to pass that on to the customers too.

Bruce Billson

I'm old enough to know when I had one of my early businesses that you used to pay a flat amount a month as a banking charge and covered in that were all sorts of things, including these fees, including the terminal, including the current account that I was using for operating business. And that was all bundled together into a monthly fee. What happened, though, at some point – and it was probably right and the RBA were championing this, that we needed to develop domestic payment systems to take on these international providers like Visa and MasterCard - they allowed the picking out of these transaction costs and payment charges out of that bundle. I didn't get any savings, I just got more fees added on top. And that was being used as a justification to get funding to invest in some competitor so that we weren't beholden to international card schemes. 

Fast Forward, we've still got this challenge, and there's even people talking about needing to do the same thing to invest in a domestic scheme. At the same time, you can't actually work out for many merchants just how and why they're being charged what they are. And in between, people are slipping in saying, hey, Leon, don't worry about it. We'll give you this flat fee every time you go and buy a pizza. And you'll know, and that'll be great. 

But what that providers then doing is they're finding the cheapest option to complete that payment and then taking the difference. They're actually profiting out of the mystique. They're actually making money out of the gap between the flat, convenient, easily understandable fee and what we've been calling for as an automated option, least-cost routing. They'll go and find the cheapest channel, which is under that flat fee, and keep the difference, and that's their business model. 

We're calling on least-cost routing to be mandated. About half of the little terminals in businesses have that capability, but the banks haven't activated it. We just think we can do a whole lot better here and take a needless cost imposition of small merchants and in turn, off consumers, and we should get on with that now. 

Leon Delaney

Indeed, Bruce, thanks very much for your time today. 

Ends