SMEs slogged with card transaction fees three times higher than big business, with least-cost routing yet to reach full potential

Australia’s smallest businesses are saddled with card transaction fees triple that applied to major corporations and the take-up of cheaper options remains “disappointingly low”, according to the Reserve Bank of Australia.

In a speech delivered to the AFR Banking Summit on Tuesday, head of payments policy Ellis Connolly outlined the Reserve Bank of Australia’s focus on lowering the cost of card transactions and boosting competition in the payments sector.

In particular, Connolly drew attention to the fees Australian small businesses pay to debit card providers and the banks each time a customer uses their card to make a purchase.

These wholesale payment costs include interchange fees set by card providers including Visa, Mastercard, and eftpos, which kick in when a merchant’s bank interacts with a cardholder’s bank.

Additionally, both merchants and partner banks pay scheme fees to the card issuers every time a transaction is processed on the card network.

The RBA has “observed that higher wholesale payment costs are charged for small businesses, and for mobile wallet and online transactions,” Connolly said.

Average wholesale payment costs for businesses that process under $100,000 in card transactions a year exceed 1.5% of transaction value, and remain over 1% for businesses transacting between $100,000 and $1 million a year.

However, major businesses processing over $10 million in card transactions per year face transaction costs near 0.5%.

Source: RBA

This includes “much higher” interchange fees for small businesses compared to major companies, Connolly said, with the RBA suggesting big businesses have more leverage than SMEs when brokering deals with card providers.

“Very large businesses negotiate low ‘strategic’ interchange fees across all their card transactions,” he said.

“In contrast, the interchange fees for small business transactions tend to be much higher and we have noticed that they often face even higher rates for mobile and online transactions than when a card is tapped.”

Not only do small businesses cop higher fees, consumers “ultimately pay for them through higher prices for goods and services” than those at bigger retailers, Connolly added.

“Disappointing” adoption of least-cost routing

To counter those surging costs and promote competition among card providers, the RBA has long championed least-cost routing (LCR), whereby merchants can select the payment infrastructure offering them the cheapest transaction costs any time they make a sale.

Retail groups say LCR could have a profound impact on small businesses.

In its submission to the RBA’s 2021 Review of Payments Regulation, the Australian Retailers Association said merchants could recoup $1.3 billion a year if all debit card transactions were “optimally routed”, with the greatest benefits flowing to small retailers.

The Australian Retailers Association last year joined with other leading business advocates, including the Council of Small Business Organisations Australia, to issue an open letter expressing the consequences of those costs.

“Australia’s merchants, the vast majority of which are small businesses, cannot afford to pay higher fees for their debit transactions,” they said.

Yet LCR is far from the default option for merchants.

For the first time, the RBA revealed 90% of payment providers do offer LCR to merchants, but “the take-up of LCR by merchants remains disappointingly low, with just over half of merchants on plans with LCR enabled,” Connolly said.

Small businesses may miss out on LCR because they are yet to move on from their old payment provider plan, or they lack next-generation terminals capable of LCR, he added.

The problem is even more apparent in online transactions.

Despite setting an “expectation” that payment providers would enable the system for online purchases by the end of 2022, the industry is lagging behind.

“While a lot of work is underway, the industry has not met this timeline, which is disappointing,” Connolly said.

“We expect to see substantial progress by June this year on enabling LCR for merchants online.”

Considering the new wave of mobile payment technology, even greater challenges await.

LCR is “feasible” for Apple Pay, Samsung Pay, and Google Pay, Connolly said, with the RBA hoping to establish LCR on those platforms by the end of 2024.