TRANSCRIPT

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

2CC Radio Canberra

Subject: Merchant transaction fees (least-cost routing)

Leon Delaney

The Australian Small Business and Family Enterprise Ombudsman, Bruce Billson, says mandating something called least-cost routing could stop banks from overcharging for things like tap-and-go payments and other forms of electronic payment. And that would save both small businesses and consumers. There's more to this story than meets the eye. So, let's go straight to the source. The Small Business and Family Enterprise Ombudsman Bruce Billson. Good afternoon. 

Bruce Billson

Leon, great to be with you and the Capital listeners. 

Leon Delaney

Thanks very much for joining us today. Now when I go and pick up my pizza on half-price Tuesday and I get my premium pizza for $9.50 because it's half price and then I tap-and-go, I find it still costs me over ten bucks. How did that happen? 

Bruce Billson

A couple of moving parts there. And this is one of the great mysteries we're trying to reveal. There's a whole relationship between the card providers, so think of Visa, MasterCard, American Express, EFTPOS and the like, and to execute the payment they put a charge on and then there's the bank that's issued the card and there's a little clip for them as well, and a number of other moving parts.

It all amounts to a charge that goes to the merchant, being the business that's supplying the goods and services, who may either choose to absorb that cost or pass it on to the customer as a surcharge. Now, the thing that we're quite concerned about is too often that payment is routed down a more costly option than one that's readily available, and we just don't think that's cool.

Leon Delaney

Okay, before we get into the intricacies of that particular mechanism, why should customers have to pay a surcharge at all? Before businesses started accepting electronic payments, they accepted payment in cash. Now handling cash comes with a cost - the cost of the time that it takes to manage the cash, to hold the cash, to transport the cash to the bank and back from the bank. That is an overhead of the business. Now, if I'm paying electronically, I save the business all that time and trouble. Why should I have to pay their fee? 

Bruce Billson

Good argument. A couple of things are in that, though. One is that the handling and receipt of cash of itself doesn't trigger a charge to the business. So that's one point of difference. And secondly, in the world that we're in now, different cards have different charges attached to them. And the law allows a merchant to recover the actual cost or thereabouts of that charge. So, when you're not being billed an amount for cash, that's why you don't see much. And all that cash handling process that you're talking about is embedded in the price of the goods and service that you're buying.

Leon Delaney

So should be the transaction fee. It should be an overhead of business.

Bruce Billson

And in many cases, it still is Leon, but not in every case. And that's what we're seeing in the popping up of these surcharges. And I'm trying not to use brands, but there's a particular card that's much more expensive to the business that's accepting it, and in many cases they will charge a surcharge or suggest they won't receive that card at all. 

For other transactions, I'll give you an example. For other transactions, a $20 pizza and garlic bread combo, might be cheaper on one form of card that is a percentage of the sale price, whereas another card might charge you as a fixed price for the transaction.

So that fixed price per transaction looks pretty good when you're paying for a $150 dining experience or something more expensive. But it looks really expensive if you've got a small amount of payment to be made. And that's why we're arguing the banks have the capability in most cases to direct it down the least expensive payment pathway, and they should. But they don't in all the cases and that's why there's between $800 million and $1 billion a year of extra charges in the system that either the business, and in many cases the customer, end up paying when they shouldn't have to. 

Leon Delaney

So, these are the intricacies that I was referring to before. When I present my card, I've got no way of knowing which avenue the funds will actually take when they transfer from my bank to the business bank. They could be going offshore somewhere. For all I know, they could be going anywhere and passing through all sorts of gateways. So, this least-cost routing system, how does that work? Does that just guarantee that the smallest possible fee is the one that gets charged? 

Bruce Billson

Pretty much that’s it. You’ve nailed it right on the head. I use that example about transactions that are more expensive and in some of those cases a fixed price per transaction might look pretty attractive. But for a smaller, you know, $5 payment that fixed charge, looks mighty expensive. Whereas in other examples it might be a percentage of the transaction price. Now that looks pretty nice when the numbers aren't that big, but when you get to a larger transaction, like paying for your car maintenance service or something like that, that can be a pretty big number.

Now what we're saying is in most cases, the banks and, let's call them the appliances, the terminals that they use, have functionality that can choose the one that is least expensive. And we're saying it should do so. 

And even when you're buying something online where you're entering in your card details - sorry for the jargon that’s ‘card not present’ as in your not waiving the card, you’re entering details into a digital platform and an e-commerce sale - even in those cases you can’t always be certain it’s going to be routed down the payment pathway that’s least expensive to the merchant and as a result least expensive to you as the consumer.

Leon Delaney

Now the business operator has no clue what avenue the payment is taking either do they? This is completely under the control of the banks, isn't it? 

Bruce Billson

And this is where we are a little frustrated because the banks say, this least-cost routing thing, it's available, it's not our fault the merchants haven't taken it up. And what we've said is, hang on a minute. The merchants are busy doing what they do to delight their customers. The intricacy of these sorts of things, surely you should explain that to the merchant as part of the service that you're trying to provide and explain to them what the options are and how to activate them. 

In about half of the occasions where a least-cost routing option is available, it hasn't been activated because the merchants are too busy trying to pay the bills and, you know, keep their head above water. And the banks have been less than enthusiastic in explaining the options available to them and then helping them to activate them. 

Leon Delaney

It's one thing for you to make a call for the banks to do the right thing. Are you also going to lobby the government to legislate for them to do the right thing? 

Bruce Billson

We have and we are and we will continue to do so. 

A couple of things have come up. There's been a big payment system review where the Payments Board of the Reserve Bank aren't sure whether they've got jurisdiction over electronic wallets and these sorts of things. 

So to the (Reserve) Bank's credit, they've said we're going to clarify all that with reforms that try and keep pace with the changes in the economy and new ways of paying things like waiving your phone rather than the card and should that necessarily be routed down Apple Pay or should you have other options, as an example.

And the Reserve Bank with that strength and clarity of their role and function, we're hoping they do a little bit more than just send strongly worded letters to the banks saying please do the right thing. And we're urging them to get up and about and on-their-bikes and really pressing for this to be done sooner rather than later.

Leon Delaney

Indeed. And if it makes my Tuesday night pizza just that little bit cheaper, I'm all in favour. Thanks very much for chatting today.

Bruce Billson

Great to chat with you Leon and take care.

Leon Delaney

Bruce Billson, the Australian Small Business and Family Enterprise Ombudsman.