A quick 'tap and go' has made it very easy to make a payment for something we need.
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But the simplicity and convenience of making instant and contactless electronic payments in person or online masks an incredibly complex structure of hidden costs for consumers and small businesses.
The fact some merchants are recovering the cost of these transaction payment fees via surcharges has raised public awareness of yet another impost on small and family businesses.
Across our economy, merchants are paying higher fees and charges than they otherwise should worth a staggering $1 billion a year. And because 98 per cent of businesses are small businesses, they are wearing the greatest share.
Not only that, but the Reserve Bank found on average, these fees cost small business twice as much as what it costs a large business to process the same transactions - another example of where market power advantages bigger businesses compared to the 'take it or leave' proposition dished up to smaller businesses.
As we move towards a cashless society, the pressures are only going to increase.
The solution is to mandate a system called least-cost routing so the fee charged to small businesses is always the lowest fee available. This is the best outcome for smaller merchants and their customers.
Most of the cards we use are "dual network", meaning they typically have a VISA or MasterCard logo and sometimes an EFTPOS logo. When we buy something using the card, unless we instruct the merchant or website otherwise, the usual default is to a more expensive international network. This is most prevalent when we tap-and-go or buy online.
Sometimes the customer sees the fee but in many cases they do not. However, it is still charged to the merchant who cops it on the chin or passes it on to the customer as a surcharge by adding it to their prices.
Everyone loses - except the banks and payment companies. Current law limits the charging of fees to the actual costs incurred, so you'd think there is no upside for financial institutions steering transactions to a more expensive payment. But there is.
What is not transparent and made clear to the merchant or customers are the incentives banks receive for steering more transaction traffic and value toward the international card companies and how much that is worth.
It is a bit like having a sat nav that seems to most often guide you to use the more expensive route involving a toll road, regardless of what is the fastest, cheapest or best way to go, and then sees the toll road operator rewarding the sat nav company for the patronage being sent its way. Not OK.
Least-cost routing means when a customer makes a contactless debit card transaction, it will be routed through the most affordable option for the merchant and at least potential surcharge cost to the customer.
Mandating least-cost routing would be a simple step that could help to ease some of the cost-of-living pressure across the economy if it was fully implemented.
My office undertook research which found poor transparency of merchant fee structures and low awareness among merchants and consumers of how dual-payment debit-card payments work.
There is inconsistent use of payments terminology between government and the banking sector and in inconsistent application of surcharging rules for merchants to cover the cost of consumers' chosen payment method.
Multiple government reviews and inquiries have recommended action. And action is what we urge.
Treasurer Jim Chalmers has made changes that are a positive step because they aim to give the Reserve Bank more power to lean in when overseeing the performance of payment service providers, which will ultimately promote stronger competition in the payments market and lower payment costs for small business.
The Reserve Bank has been putting pressure on the banks, who are moving at a glacial pace. Only 65 per cent of payment terminals are enabled with least-cost routing and the big four major banks have only turned the system on for fewer than half their customers. The latest Reserve Bank figures published in February shows the ANZ is the worst with only 31 per cent of its customers connected.
At the same time the banks have slashed the number of branches throughout Australia by one-third and the number of ATMs has been cut by two-thirds since 2017.
The banks and major card providers claim customers don't want least-cost routing. That's laughable when they have done all they can to go slow on educating merchants and consumers on what is going on and leaning in to assist small businesses in activating least (or lesser) cost routing in a way that is most cost-effective for their operations and most beneficial for their customers.
The banks are choosing to be an ally of big card providers instead of the 2.5 million small businesses that provide jobs for 5.1 million people and account for one-third of our nation's GDP.
Too many people (both consumers and merchants) simply don't know least-cost routing exists. For example, how many people know they can choose the payment network in their mobile wallet or how to do it? And how many small businesses have been supported to make the change that will save them money when margins are under real pressure?
Buy now, pay later providers have no interest in promoting this, either. Average transaction costs in 2020-21 were 6 per cent of the transaction value compared to just 95 cents for the average debit transaction. That's a difference of $496 million.
We need to better explain how the payment system works and have a more transparent fee structure to allow comparisons, support informed choice and promote competition.
There are many different ways people can pay at the point-of-sale, whether it is a credit or debit card, mobile wallet, online token or third-party gateway and small businesses should not have to pay higher fees depending on which option is chosen by the consumer or when no choice is made.
This is not about limiting consumer choice but ensuring it is an informed, conscious decision of a consumer or merchant to use a more expensive payment option and the cost and surcharge consequences that choice involves.
It is way past time to mandate least-cost routing, for the authorities to ensure the mandate is implemented as fully and as fast as possible and have an easy-to-use system to make payments that comes at the least cost for consumers and small businesses.
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