Future of Payment Fees in Australia: What Small Businesses Should Know

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It is fair to say, we are now a society who pays for their purchases via digital methods. However, whilst the placing of our phones or a simple tapping of our card near a terminal offers incredible convenience when we buy our sushi lunches or latest fashion purchases, it has come at a cost.

Recently, the RBA revealed that, thanks to surcharges, Aussie consumers are collectively out of pocket to the amount of $960.26 million on average, every year, when they choose to pay by card. And they are not happy about it.

Indeed, they have stated they will mandate a scheme to reduce merchant fees and card charges if payment processors and banks don’t put measures in place to do so themselves.

But what does this mean if you are a small business that relies on accepting digital payments to survive in the current uncertain economic landscape?

Here is what you should know.

What are these surcharges for?

In European Union countries, as well as the UK, surcharges are banned. However, in Australia, retailers (for the time being) are allowed to recoup some of the costs of processing transactions electronically through surcharging.

This means that the $7 cake you treat yourself to at your local coffee shop might end up costing you $7.12.

While this is just a nominal increase, as we move towards a cashless society, it hardly seems fair to consumers who would not have any other way of paying.

Although larger businesses might be able to absorb the payment processing costs they incur from banks and payment processors, smaller retailers – who already have tight margins – are less able to.

So, it is not surprising that an increasing number of them have started to pass them on to their customers. Hence, the grumbling from the RBA.

How much are surcharge fees?

The fees retailers are charged for electronic transactions by banks and payment processors are dependent on how these payments are processed.

Typically, EFTPOS transactions cost between 0.3-0.5% of the overall sale price, while Mastercard and Visa can be anywhere from 0.5% to 1.5%, depending on whether a debit or credit card purchase is made.

However, cards such as Diners Club and American Express incur the highest processing fees. Moreover, they are not covered by Australian regulations.

Although these costs are generally noted among consumers, the real kicker is that some banks are directing all their transactions through the more expensive networks of Visa and Mastercard.

Therefore, even though Australian consumers might think their tap-and-go purchases are being run through EFTPOS, if their debit card also has a Visa or Mastercard logo on it, they could be unwittingly hit with a more expensive charge – even though both processing networks are available.

RBA’s LCR Scheme

Having identified the issue of mass surcharging, the RBA has launched a scheme called the ‘least-cost routing’ or LCR. This scheme is designed to significantly reduce the costs for businesses (and, in particular, small business) to process electronic transactions.

Essentially, this scheme means that the payment terminals in retail outlets and other businesses should default automatically to the available card network that processes the transaction at the lowest cost. It is hoped that by putting downward pressure on payment costs, the knock-on effect will result in consumers incurring lower surcharges.

However, according to the RBA, only 64% of payment terminals in Australian businesses are currently LCR-enabled. This means, statistically speaking, at least, for every third purchase an Aussie makes with their debit card, they will be hit with a higher than necessary surcharge.

According to some analysts, the figure is at this level because not all banks have rolled out the system. They point to LCR being less profitable for them as a potential reason.

Alternatives

While some banks and payment processors are cashing in on surcharges at the expense of their business customers, others have seen an opportunity to present a more attractive option to them.

For instance, retailers and businesses that operate EFTPOS machines like Smartpay can benefit from low-fee or no-fee solutions.

These solutions enable them to either cut fees out entirely to their customers by incorporating them within the sale price or to charge them a flat rate, regardless of how much they spend.

This, in turn, should result in greater transparency and trust within the overall purchasing process.

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