The industry debate between banks and small business groups over merchant fees is set to escalate after the Australian Banking Association accused independent research firm - CMSPI - of “inflating” the cost savings that local retailers stood to gain from the introduction of least cost routing.
Despite pressure from the Reserve Bank since 2019 Australia’s four major banks have been slow to roll out least cost routing (LCR) services that give retailers the power to direct contactless debit transactions away from payments schemes selected by their banks.
The four major banks default the processing of most contactless debit transactions to the Visa and Mastercard networks even though RBA data indicates that the domestic debit scheme - Eftpos - is on average a cheaper option for merchants.
Moreover, the banks have not indicated whether they will extend the benefits of least cost routing to ecommerce and mobile debit transactions as international software providers deliver them the technical capability to do it.
Global consultancy firm CMSPI estimates that the opportunity cost for Australian merchants not having simple access to LCR on all debit transactions equated to more than A$800 million in 2021.
CMSPI is one of the world’s largest merchant services advice firms. In Australia, its clients include BP, Shaver Shop and Subway.
Small business groups such as COSBOA and the Master Grocers Association have cited the CMSPI savings estimate to advance their campaign for banks to simplify and widen LCR across the debit payments system.
In response to questions from Banking Day on Monday, the ABA launched a wide-ranging attack on CMSPI’s research, saying that its $800 million cost savings estimate was ‘inflated’.
“CMSPI’s estimates include all debit card and credit card payments,” an ABA spokesperson said in an email response to questions.
“LCR involves choices to route dual-network debit card transactions through either the international card scheme rails or the EFTPOS system.
“LCR is available for dual-network debit cards, therefore the inclusion of credit card
transactions in CMSPI’s estimate considerably inflates the estimated savings.”
Robbie MacDiarmid, CMSPI’s head of Asia Pacific, rejected the ABA’s claim that the $800 million savings estimate included credit card transactions and that his company stood by the figure.
“The $800m figure represents the benefit of routing all debit card transactions optimally through whichever scheme is cheaper on a transaction-by-transaction basis, based on 2021 data,” he said.
“We are currently updating our figure given increases to debit spend and a changing card mix, and will be releasing this new figure shortly.”
Global payments software developers such as Worldline and Quest are now rolling out new digital platforms that will enable least cost routing services to be offered to merchants beyond contactless transactions.
However, the decision to switch on the capability resides with the banks.
“We advocate for routing availability across every debit channel to maximise benefits for merchants and consumers,” MacDiarmid said.
The ABA and CMSPI are also at loggerheads over the impact of “flat rate” merchant plans introduced recently by Commonwealth Bank and NAB, which apply the same fee to every card transaction accepted by merchants regardless of whether they are credit or debit.
According to the ABA, CMSPI’s savings figure ignores the ‘positive’ impact of such new products that it says “are already helping SMEs save on fees”.
MacDiarmid rejected the ABA’s assertion.
He said that the recently introduced flat rate products were distorting price signals in the card payments market.
“While we support every effort to reduce merchant fees for small business, we have identified that flat rate merchant deals have a distorting effect on card fees,” he said.
“While the acquirer’s margin on some more expensive card types may be negative with the flat rate, lower cost alternatives could see margin of over 90 per cent for a particular transaction.
“It is difficult for small business to understand exactly what the deal means for them.”
CMSPI is not the only payments research firm to highlight the untapped potential of LCR in the Australian economy.
Sydney-based firm Qi Insights estimates that the optimal opportunity cost of inefficient LCR rollouts stood at around $902 million at the end of December.
“Qi's estimates are a simple measure to get the total potential merchant fee savings in debit card spend,” said Qi director, Peter Drennan.
“It takes the quarterly debit card purchases ($115.7 billion) and the difference in merchant fee between Visa/Mastercard and Eftpos (0.22 per cent) for those purchases.
“Annualised, the estimate is $902 million at the end of December 2021.”
The ABA’s defence of the industry’s rollout of LCR is likely to disappoint COSBOA, which yesterday called on the major political parties to set clear timelines for the major banks to deliver easier access to merchant routing.
However, the ABA spokesperson said that competition in merchant services was healthy in Australia and that fees on average were steadily coming down over time.
“Average merchant fees for card transactions in Australia are lower than the Europe, US, Canada and New Zealand, and materially lower than the fees charged by some BNPL providers,” the ABA spokesperson said.
“Australian banks serve merchants with diverse payments needs, which is why merchant choice routing for debit cards is proactively offered alongside simpler payments products, such as service bundling options.”