Visa and Mastercard to limit “tying conduct” that offers some merchants cheaper credit processing fees

Payment giants Visa and Mastercard have pledged not to offer merchants cut-price credit transaction rates if they lock into their debit transaction systems, a move small business advocates hope will level the playing field for local SMEs.

On Wednesday, the Reserve Bank of Australia (RBA) announced both Visa and Mastercard have signed voluntary undertakings to limit “tying conduct”, or preferential credit transaction fees which encourage merchants to route debit transactions through their card provider’s preferred pathway.

Those deals are of concern to the RBA, as it believes offering merchants sweetheart deals on their credit transaction rates can limit competition in the debit card market and level additional costs on the payment system.

In a statement, RBA deputy governor Michele Bullock said the new undertakings “will support competition in the debit card market by ensuring the debit schemes compete solely on the basis of their debit card offerings”.

How are debit transaction fees applied?

The vast majority of debit cards issued in Australia are dual-network cards, meaning cardholders can elect to process payments through providers like Visa or Mastercard, or via the eftpos network.

When a Visa or Mastercard holder inserts their debit card into a card reader, selecting SAV or CHQ will route the payment through the eftpos network, while CR will channel the payment through the Visa Debit or Mastercard Debit system, respectively.

But contactless payments are automatically routed without a customer’s input, meaning in-person transactions can be automatically routed through the card issuer’s preferred system.

Contactless Visa Debit and Mastercard Debit transactions are essentially identical to contactless eftpos transactions for the customer.

However, merchants pay a transaction fee every time a debit transaction is processed, and Visa and Mastercard fees are considerably higher on average than eftpos fees.

Those fees add up: Australian merchants paid $1.3 billion in debit card transaction fees in 2019 alone.

Crucially for small businesses, transaction fee structures can vary from merchant to merchant.

Data compiled by the RBA shows that merchants with smaller annual debit transaction values generally pay more per debit transaction than bigger companies, across Visa, Mastercard, and eftpos.

The RBA notes that big businesses may be able to negotiate lower transaction fees than smaller merchants by leveraging their higher transaction volumes.

What do the undertakings say?

The new agreements from Visa and Mastercard aim to limit a driver of that disparity: preferential credit transaction fees offered to major companies on the condition they automatically channel contactless debit payments through the system of their card issuer’s choice.

Visa and Mastercard have now agreed that the value or volume of a merchant’s debit card transactions will not influence credit transaction processing costs.

If a merchant chooses to route their contactless debit payments through the eftpos system, they will not be penalised with higher Visa Credit or Mastercard Credit processing rates either, the agreements state.

Those measures come into effect from July 1.

Both card issuers have agreed to a new dispute resolution framework for agreements entered into from that date.

Each company will also appoint an independent auditor to ensure compliance with the undertakings.

What do small business advocates think?

The measures were welcomed by Matthew Addison, chair of the Council of Small Business Organisations Australia, which has long campaigned for least-cost routing — the ability for merchants to choose the payment processing system which imposes the lowest fees, regardless of a card issuer’s preference.

“Unchecked card transaction fees can hurt small businesses by increasing their operational costs, reducing their profit margins, and making it harder for them to compete with larger businesses,” he told SmartCompany on Thursday.

Beyond the new “tying conduct” agreements, Addison said mandating the least-cost routing scheme would help small merchants compete more effectively against major companies.

“The journey continues,” Addison continued.

“COSBOA calls for transparency to the small business as to what cost they are paying, and what are their options” for accessing the most cost-effective payment processing systems, he said.