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Why you’re paying extra for card transactions


Australian preference for card payments over cash is costing consumers nearly a billion dollars annually in surcharges, according to analysis derived from RBA data. 

Alex, an IT professional from Melbourne, laments paying approximately $200 a year in fees, primarily for banh mi and coffee purchases. Unlike the UK and EU, where card surcharges are prohibited, Australian retailers can pass payment costs to customers, provided they don’t profit from it.

Alex observes a rising trend in surcharging, attributing it to the shift towards a cashless society. With some establishments refusing cash entirely, consumers like Alex feel compelled to accept the fees, often struggling to discern the exact surcharge percentage.

The prevalence of dual-network debit cards, featuring both Mastercard/Visa and eftpos logos, complicates matters further. Opting for the cheaper eftpos network when swiping or inserting the card is feasible, but tapping defaults to the pricier Mastercard or Visa network. While major retailers absorb payment costs, smaller businesses resort to surcharging due to inflation and rising expenses.

RBA reports indicate varying transaction costs: eftpos averaging 0.3% for $100 purchases, while Visa and Mastercard debit transactions average 0.5%. Credit card transactions incur higher fees, with Mastercard and Visa at 0.9%, and American Express and Diners Club at 1.3% and 1.7% respectively. To alleviate business expenses, the RBA promotes least-cost routing (LCR), aiming to automatically process debit transactions through the most economical network.

Governor Michele Bullock has warned of mandating LCR by mid-year if industry compliance doesn’t reach 80%. Small businesses, anticipating substantial savings, support this initiative, highlighting potential annual savings exceeding $100,000. Embracing LCR presents a pragmatic solution amid the prevailing high business costs, necessitating active promotion by payment providers and banks.

Luke Fossett, General Manager, GoCardless Australia and New Zealand said: “It’s alarming that whilst the RBA are trying to tackle the reduction in payment costs from multiple angles, Australians are being forced to pay close to a billion dollars each year thanks to payment surcharges. These surcharges are directly related to increasing costs and compressing business margins. While small to medium businesses often cop the blame in consumer circles, it’s something they can’t necessarily help. Unlike their larger counterparts, these businesses may struggle to absorb these extra costs on top of other rising operational expenses and a drop in customer spending. 

In an attempt to minimise the soaring card costs, last reported by the RBA in their payment statistics report in January this year, surcharging seems to be one of the most common tactics used by businesses of all shapes and sizes. Whilst surcharging is without doubt one of the easiest ways to pass through costs, SMBs should consider other tactics to help find the balance between conversion, customer satisfaction, and cost management.

For example, businesses with a recurring revenue model could offer or increase the priority for a customer to pay using Direct Debit from a Bank Account, something that typically comes with lower and fixed costs. It also doesn’t have the complexity behind the scenes compared to cards, meaning costs remain consistent and predictable for years on end. This could offer smaller Australian businesses the chance to reduce their operating costs without transferring the burden to their customer.

The other alternative is to review the way their card provider passes on their costs. The bundled card costs model, common among payment providers, limits the ability of SMBs to get the visibility they need to review and negotiate payment costs based on what types of cards they accept.

Whilst it looks frighteningly complex on the surface because not all payment types cost the same to process, all it takes is a savvy CFO or Finance Analysts to quickly get on top of this way of billing. As SMBs often get the reputational hit, there’s a clear need for transparency here and perhaps a need to reevaluate the accountability to manage all parts of the payments ecosystem. In the meantime, businesses should consider reviewing their payment providers to ones that offer greater transparency as an option.

At the end of the day, it’s within the broader public interest for the industry to advocate for a fairer and more transparent payment system. But for now, by exploring alternative payment and billing processes, we can reduce costs for businesses and customers who feel the pinch in this economy.”

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