The rise of contactless card payments and mobile wallets is squeezing the margins of small businesses, as higher merchant fees increase the cost of taking digital payments, says Mark McKenzie.
Speaking at the Council of Small Business Organisations Australia’s (COSBOA) SME payments summit today, McKenzie said this issue of least cost routing is “a particular challenge” for small businesses, with merchant fees coming “straight off their bottom line”.
McKenzie, the chief executive of the Australasian Convenience and Petroleum Marketers Association and former COSBOA chair, said small business associations have become increasingly concerned with the rising cost of accepting electronic payments for merchants since 2015.
“Merchant fees are effectively a cost of doing business and they’re accelerating much faster than other costs,” he said.
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Merchant fees, which a business pays whenever a customer uses a debit or credit card, vary depending on the network a payment is routed through. Sending a payment through the domestic eftpos system is often cheaper than through the networks of US card giants Visa and Mastercard.
Most banks give businesses the choice to send payments through the cheaper network using what’s known as least cost routing (LCR).
But according to McKenzie the complexity of fees is a major frustration among small businesses and hinders their ability to access the less costly option.
“It’s an incredibly complex system,” McKenzie said.
McKenzie said details about the fees charged between the merchant’s bank and the card holder’s bank are more readily available than those linked to the business-to-business relationships in the payments system.
“What is very much in the background are the B2B issues associated with the relationships operating between the issuing banks, the card schemes and eftpos,” he said.
This is why COSBOA is calling for greater transparency in the payments system, so small business can better understand where and why merchant fees are being applied.
For McKenzie, the need to improve the system boils down to the fact that small businesses are the customers of payment service providers and deserve greater choice.
“When we think about the payment system, merchant services are a service,” McKenzie said.
“It’s actually the merchants who are the customers of the system but it’s the supplier of those services that is making the decision about which service they actually route,” he continued.
“From our perspective, that is innately unfair, and it is innately wrong.”
McKenzie said small business groups will continue engaging with the government, the Reserve Bank and other players in the system in a bid to give merchants greater choice.
Australian retailers paid $67 million in avoidable merchant fees in August this year for accepting debit card payments, according to a study by global payments consultancy CMSPI.
That same study found Australia fares poorly when it comes to the number of transactions that can be sent through cheaper networks. For example, only 18% of transactions are routable in Australia whereas 83% are routable in France, and 61% in Germany.