Crippling card fees breach bank social licences and betray small business - Independent Payments Forum

Billions of dollars in debit and credit card fees currently levied unequally on Australia’s small businesses are a clear breach of banks’ social licence to operate, according to the Independent Payments Forum (IPF).

Recent calls by some banks and US card schemes seek to protect all aspects of their fees – interchange, scheme fees and margin – while at the same time hide them by banning surcharging.  These arguments are articulated in their recent public submissions to the Reserve Bank of Australia’s (RBA) Review of Merchant Card Payment Costs and Surcharging.

IPF says these submissions clearly demonstrate an agenda to prop up their regime of penalising small businesses and their customers with unfair fees that are, according to the RBA, often three to five times higher than big businesses.

“This skewed approach to fees is a betrayal of small business and their customers who want to access their own money at the lowest possible cost – no matter where they shop and whether it is via cash or debit cards,” IPF Co-Founder Brad Kelly said.

“In the end, this is all about banks and card schemes maintaining their record profits and sweetheart deals with big retailers and supermarkets, while attempting to hide the high fees they levy on small business by banning surcharges.”

Rather than becoming less expensive as the market grows, average debit card fees in Australia have grown over the past decade.

Due to deliberate marketing strategies by the industry to move away from cash, Australians now make 15.3 billion card payments worth $1.02 trillion a year.

The vast majority of these transactions are on debit cards amounting to 76% of total purchases.

Australians now carry 48 million debit cards, 17 million credit cards and over 20 million smart phones, capable of making payments at over one million terminals across the country, and at almost 100,000 stores online.

Despite rapid growth in debit card transactions, debit card fees have defied network economics and remained stubbornly high over the past decade, even with standard regulatory intervention on interchange rates. The lion’s share of this cost burden is borne by small businesses and their customers.

In its submission to the RBA, IPF argues that the current system of card fees is a clear market failure that negatively impacts the nation, particularly small businesses and consumers. “Abolishing surcharging without addressing fees, will simply mask this market failure and result in price increases and job losses at small businesses that will ultimately be detrimental to consumers,” IPF Co-Founder Warwick Ponder said.

“To maintain public trust and fulfil their social obligations, banks must provide equitable and cost-effective payment solutions, demonstrating their commitment to serving all members of society, including small businesses. Access to debit is a fundamental aspect of this social contract that banks and the payments industry have with Australian society.”  

“Replacing cash with debit cards is a significant economic and societal shift and imposing explicit charges for accessing funds in an environment where cash is scarce risks alienating customers and penalising small businesses.”

“Because of this market failure, we need and rely on the RBA to step in an ensure those with the least market and bargaining power get a fair deal.”  

IPF is very concerned about commentary in some submissions which had thrown small businesses under the bus, including the Australian Banking Association’s assertion that, “Some merchants may view surcharging as an additional revenue stream rather than a cost recovery mechanism.”

“When you tap your card for a $100 transaction at your local small business, that business gets $100. The $1.60* surcharge goes to the payment provider to cover the cost of acceptance. If we ban surcharging, the small business will only get $98.40. This is almost their entire profit margin,” added Kelly. “The only ones making a profit from these fees are banks, payments providers and card schemes.”

“Banks have a privileged position in our economy, essentially supported by taxpayers. Card schemes typically have massive scale and oligopoly power exercised on a global scale. Large retailers have scale and market power with cozy relationships and sweetheart deals with the big banks and Visa and Mastercard. Because of these reasons and the sheer complexity of payments systems which undermines informed choice and efficient markets, the payments industry is vulnerable to market failure as we have seen in Australia.”

The ACCC in their submission acknowledged the discrepancies between small and big business: “The current retail payments system appears to have shifted the greatest costs to small businesses and consumers, who are the actors in the system with the least bargaining power”.

The Reserve Bank’s own analysis shows that small businesses incur much higher fees than their larger counterparts. Major retailers, such as Coles, Woolworths and Chemist Warehouse have not tendered public submissions to the inquiry.

* Current fee based on 1.6% blended rate.