Tap to the future: Government could crack down on payment companies making it harder for SMEs to access the cheapest fees

Countless Australian retailers pay a premium to international giants like Visa and Mastercard when they process card payments, potentially missing out on cheaper transaction options every time customers tap-and-go or use a digital wallet.

Now, a federal government plan to future-proof the Australian payments system is focused on those merchant fees — and legislative crackdowns are possible for major companies which control how small businesses process their card transactions.

On Wednesday, the Treasury released a consultation paper on the federal government’s ‘Strategic Plan for the payments system’, which it hopes will bring the legislation up to speed with the rapid development of payment technology and changing consumer preferences.

The consultation paper seeks feedback on a number of key initiatives, including continual efforts to ensure small businesses have access to least-cost routing.

Least-cost routing (LCR), also known as merchant-choice routing, gives business owners the power to choose which payment network will handle tap-and-go card payments.

The majority of debit cards in Australia are dual-network cards, meaning they can facilitate payments through both the eftpos system, and those provided by international payment giants like Visa or Mastercard.

Customers who insert or swipe their debit card can choose which network they want to use, opting for the eftpos network or the Visa and Mastercard systems.

However, when a customer taps their card, the payment terminal itself can determine which network to use.

This can lead to more payments being funnelled through the Visa and Mastercard networks, which can charge merchants up to four times as much as transactions processed via eftpos.

While those fees can be small on a transaction-by-transaction basis, they can add up to a significant portion of a small business’ revenue, driving merchants to pass the costs onto consumers.

The least-cost routing initiative, led by the Reserve Bank of Australia (RBA), ensures Australian merchants have the power to determine how those tap-and-go payments are processed.

The big four banks already allow small businesses to select their preferred network on bank-branded payment terminals, and Commonwealth Bank of Australia became the first to automate the process in late 2021, ensuring its terminals automatically funnel payments through the lowest-cost network.

But concerns remain. Stakeholders fear a lack of least-cost routing automation is still inflating merchant costs, the consultation paper says.

Reviews from both the Productivity Commission and a Parliament Joint Committee have found that further government or RBA intervention could be required to promote least-cost routing automation.

While the consultation paper dwells on physical payment terminals, it also looks to the future of digital payments, and the potential for mobile wallet transactions to become Australia’s dominant in-person payment method.

“The government expects LCR to be widely available and enabled by mid-2023 for in-person‘ tap-and-go’ debit card and online debit card payments and supports the expectation set by the RBA that LCR for mobile wallet debit transactions be made available by the end of 2024,” the paper said.

The paper puts forward several options for ensuring those timelines are met.

It asks stakeholders for their views on whether the ‘Strategic Plan for the payments system’ should “note that stronger government intervention remains possible
if the RBA’s expectations are not met”.

Going a step further, it asks if an “expanded regulatory perimeter” for the Payment Systems (Regulation) Act could “enable the RBA to mandate LCR for digital wallets”.

The focus on digital wallets comes as Apple muscles into the sector with its own Apple Pay system, overturning the tap-and-go market with its phone-based solution.

Even bigger upheavals are possible, too: Apple this year confirmed US merchants will be able to use iPhones as to accept contactless payments, a move which could cut banks, and the Squares and Zellers of the world, out of the terminal game.

The plan will be tabled in the first quarter of 2023, with submissions accepted until February 3, 2023.