The study highlights the substantial cost benefits received by merchants since the RBA’s regulation of card payments systems in early 2000s and its continued focus to strengthen competition and innovation.
With card payments being the predominant method of payment, especially debit cards which are cheaper to accept, the need for stability and efficiency in the payment’s ecosystem is not only welcomed, but front of mind for the RBA who remain advocates for keeping costs down. See our previous summary of the retail payments regulation.
The cost of accepting card payments differs between merchants and across card networks. So where do we find balance?
Reforms introduced by the Reserve Bank’s Payments System Board over the last 20 years have seen the costs merchants pay per card transaction trend down over recent years.
Key highlights from the study
Smaller merchants pay higher average fees
Smaller businesses continue to see higher merchant fees compared to larger businesses. Contributing factors include:
- the rise of contactless (including mobile) payments, a trend further reinforced during the COVID-19 pandemic.
- associated fixed costs to support card payments, such as terminals, spread over a lower volume of transactions leading to higher average costs.
- negotiating power of larger merchants for favourable interchange and scheme fees set by card networks due to higher transaction volumes.
- expensive fixed pricing plans – data shows that smaller merchants and fixed plans go hand-in-hand with cost certainty regardless of the type of card used.
Eftpos vs other networks
Eftpos is the least expensive for debit card payments made through the various card networks, costing an average of 0.3 per cent of the transaction value. Both Mastercard and Visa debit card transactions have average merchant fees of 0.5 per cent (0.9 per cent for credit card transactions), which have trended down in response to least-cost routing (LCR) and other policy measures.
The rise of contactless transactions (ApplePay, GooglePay) has increased the market share of the Mastercard and Visa debit networks – the default network for these transactions. These and other mobile wallet transactions have grown strongly in recent years, with no signs of slowing.
American Express and Diners Club cards remain the most expensive networks although their fees have seen significant decline in recent years due to the RBA’s interventions.
Shifts in consumer behaviour: debit not credit
Just as contactless transactions were reinforced by the pandemic, the study notes an increase in the use of debit cards. Is the trend here to stay? Lengthy lockdowns and travel restrictions increased the saving potential for many households reducing the need for credit cards and saw limited use of foreign-issued cards – both are expensive for merchants to accept. With the easing of lockdowns and the return of credit card and international transactions, total merchant fees have started to rise again reflecting the impact of these card types.
Opportunity knocks: least-cost routing
Despite limited take-up by merchants to date, based on the first round of bi-annual reporting, the RBA is unwavering in its view that LCR promotes the competition and efficiency the payments sector needs, putting the choice of the card network used to process dual-network debit card transactions in the merchant’s hands.
LCR is available to most merchants and can incentivise networks to lower their fees, and there are many merchants out there that could be benefiting from LCR, but why aren’t they? Accessibility, information, and assistance are factors indicating that payment providers have more work to do to provide and promote this functionality to their merchant clients.
Two main policy initiatives have resulted from the Board’s Review of LCR:
1. The RBA expects payment service providers to offer and promote LCR functionality for ‘device-present’ (or in-person) transactions. A new bi-annual reporting requirement will see acquirers and payment facilitators reporting to the RBA on LCR offerings and merchant take-up.
2. The same is expected by the end of 2022 for ‘device-not-present’ (or online) transactions.
With merchants – especially smaller merchants – effectively overpaying for card payments processing, it will be interesting to see what happens in this space in the next 12 months. Perhaps with the rollout of least cost routing to online transactions, as well as for mobile-wallet transactions, it will drive more merchants to consider their overall payments costs and to be more proactive in reducing their cost of doing business.
Contact us to understand what the RBA’s policy actions and ongoing reforms mean for your business and how you can reduce costs and deliver customer and operational efficiencies in your payments system. Grant Thornton Australia has the leading Payments Advisory practice for merchants across industry and size.