The National Retail Association (NRA) is backing Reserve Bank of Australia mandates to lower electronic payment fees for retailers, particularly small businesses.
NRA CEO Greg Griffith said policymakers must act to help small businesses tackle the increased costs of living.
“We can no longer ignore the countless voices in industry calling for change to bring the sector in line with the modern digital world,” Griffith said. “The current payment system has not kept pace with changes in consumer behaviour and the significant increase of shoppers now using digital wallets and tap-and-go payments.”
In a speech at the AFR Banking Summit on March 28, RBA head of payments policy Ellis Connolly said the Australian payments landscape is continuing to evolve rapidly.
“Over the past fifteen years, there has been a striking shift from paying by cash to cards,” Connolly said. “In the Consumer Payments Survey we conducted late last year, only 13 per cent of transactions were made using cash; this share has halved over the past three years.
“Instead, consumers are making three-quarters of their payments using the card networks – half with debit cards and a quarter with credit cards.
“Australians make card payments more frequently than in many comparable economies, including those with very low rates of cash usage, such as Sweden.
“In some economies, merchants and consumers are now using fast account-to-account payment systems as an electronic alternative to cards.”
He also said that the use of mobile devices for card payments has grown rapidly over recent years.
“Around a third of consumers made a contactless payment by tapping a mobile device in the latest Consumer Payments Survey,” Connolly said. “Adoption increased substantially across all age groups over the past three years, particularly for younger consumers.”
Connolly said the dominance of cards and the consumer shift to mobile devices has buoyed the RBA's move to announce reforms in the sector, particularly lowering card payment costs for merchants.
"The trends in card payments I highlighted earlier are putting upward pressure on merchant payment costs," Connolly said. "This has been most evident in debit card use.
"In the past, customers inserted their debit card into a terminal at the point of sale and selected ‘cheque/savings’ for it to be routed through the EFTPOS network or ‘credit’ for it to be routed via the international networks (Mastercard or Visa). It turns out that most people selected ‘cheque/savings’.
"The shift to tapping cards and mobile devices, however, has resulted in most debit card transactions being routed to Mastercard and Visa and away from EFTPOS."
Connolly said that with international networks costing on average around 20 basis points more to accept for in-person transactions, "this has resulted in an increase in merchant costs for accepting debit card payments."
"In addition, the shift to online commerce has contributed to higher payment costs," he said. "It costs more to safely process online transactions, but there has also been less competition between the card networks, particularly prior to EFTPOS entering this market over the past year or so."
Connolly said he has also observed that higher wholesale payment costs are charged for small businesses, as well as for mobile wallet and online transactions. The wholesale payment costs can include interchange fees paid by acquirers to card issuers and scheme fees, which are paid by acquirers to card networks.
“All these costs are then passed on by the acquirers to merchants,” Connolly said. “Although these costs are typically not visible to consumers, they ultimately pay for them through higher prices for goods and services.”
He added that interchange fees in particular are much higher for small businesses.
“Very large businesses negotiate low ‘strategic’ interchange fees across all their card transactions,” he explained. “In contrast, the interchange fees for small business transactions tend to be much higher, and we have noticed that they often face even higher rates for mobile and online transactions than when a card is tapped.”
Connolly said the RBA is focused on increasing competition in the debit card market to keep downward pressure on payment costs for merchants.
“The main priority here is to allow merchants to choose the lowest-cost card network (EFTPOS, Mastercard or Visa) to process their debit transactions; this is known as ‘least-cost routing’ (LCR),” Connolly said.
“For merchants to take advantage of LCR, payment service providers need to upgrade their systems to support it for transactions made by tapping a card or a mobile device, or online.”
Griffith said LCR would provide small businesses with access to cheaper, domestic electronic payment schemes such as EFTPOS, rather than transaction fee processing defaulted to more expensive international providers such as Visa and Mastercard.
“Mandating LCR would provide enormous relief for small retailers at a time when many continue to battle with increasing fees from energy to rent to suppliers,” Griffith said.
“Default LCR for all in-store and online electronic payments would eliminate any unnecessary merchant fees that ultimately get passed on to customers.
“We strongly urge policymakers to take into account the stance of the retail community and RBA on this issue, and enact the necessary reforms to the electronic payment system.”