Retailers say they are being slugged as much as $550 million a year in unnecessary card transaction fees following the boom in ‘tap and go’ contactless credit cards.

Four leading retail associations have joined forces to form the Fairer Merchant Fees Alliance and are lobbying banks, regulators and government for changes to the way contactless credit card payments are processed.

When customers use their cards to ‘tap and go’, transactions are often automatically routed through expensive international payment networks rather than lower-cost debit scheme networks such as EFTPOS.

Fees for tap-and-go are about four times higher than EFTPOS and add about 40¢ to a $100 transaction for a retailer or merchant.

The extra costs – estimated to between $350 million and $550 million a year – are passed on to consumers in surcharges or higher prices or crimp retailers’ profits, putting more pressure on retailers already grappling with the weakest retail spending since the recession.

The alliance says a system known as Least Cost Routing (LCR) should be
automatically enabled for tap and go transactions, or retailers should be given easier options to choose the way transactions are processed.

Australian Retailers Association executive director Russell Zimmerman said several larger retailers such as Coles, Chemist Warehouse, McDonalds and Hungry Jacks had switched to Low Cost Routing.

“But unfortunately the majority of retailers and particularly smaller retailers haven’t done it,” Mr Zimmerman told The Australian Financial Review.

“Some banks won’t give merchants Low Cost Routing because they’re claiming to be giving them a better rate on debit and credit cards because they bundle them together,” Mr Zimmerman said.

“There’s a lot of money to be saved if we could get them to understand what it’s all about.”

The alliance, which comprises the ARA, the Council of Small Business Australia (COSBOA), the Masters Grocers Association and the Australian Convenience and Petroleum Marketers Association (ACAPMA) will make a submission to the Reserve Bank’s Retail Payments Regulation Review, which is expected to report around March or April.

The problem has already been acknowledged by the Reserve Bank of Australia, but retailers say most of the big banks and some smaller financial institutions such as building societies are dragging the chain and many smaller retailers aren’t aware of their options.

This is despite the fact that several recent government reports have called for banks and payment providers to provide merchants with least-cost routing. These include the House of Representatives Standing Committee on Economics third report on the review of the four major banks, the Productivity Commission draft report on competition in the Australian financial system, and the black economy task force final report.

“For most merchants, payments by EFTPOS can be significantly cheaper for them to accept than payments via the international schemes,” the Reserve Bank said in a recent issues paper regarding the Retail Payments Regulation Review.

“None of the major banks has taken advantage of the ability to implement LCR ‘in the background’ as a way to offer improved pricing for smaller and medium-sized merchants on simple merchant plans,” the Reserve Bank said.

With traditional credit card transactions, customers who insert their cards can choose how payments are processed by selecting the cheque or savings buttons, which accesses the EFTPOS network, or credit, in which case transactions are routed via the Visa Debit or Debit Mastercard networks.

When consumers choose cheque or savings, the retailer pays a fee of 10¢ to 14¢ per transaction but when consumers use the credit network, retailers are charged a percentage of the sale, around 45 to 60 basis points, adding to the cost of the transaction.

With contactless cards, transactions are usually automatically routed through the credit network, unless retailers negotiate with banks to have transactions routed via the EFTPOS network.

“As more and more people used tap and go, EFTPOS transactions went down and retailers’ costs went up,” said Mr Zimmerman, citing one retailer whose costs rose $400,000 on sales of $600 million.

“The banks aren’t telling [retailers] they can do Least Cost Routing, they’re leaving it up to the retailers. We’re pushing the Reserve Bank to route the transaction by the way the retailer wants them routed.”

COSBOA chief executive Peter Strong said the alliance would push hard for change.

“Fee gouging is harmful to businesses, and the banks should be doing much more to educate their customers, give them options and save money for everyone,” he said.

There is also potential to implement Low Cost Routing in online and digital payment systems, leading to further savings for consumers and retailers.

Extracted from AFR