New lobby calls for fairer least-cost routing rules

A new lobby has launched calling for changes to least-cost routing rules that would stop small to medium enterprises (SMEs) from paying $1.7 billion more in cost-of-acceptance fees than larger retailers on an average year. 

Cost-of-acceptance is an umbrella term for the fees and costs associated with accepting electronic payments for goods and services.

Payment processing platforms reward larger businesses - that process more electronic payments than SMEs - discounted cost-of-acceptance fees.  

The Independent Payments Forum Australia (IPF) was formed yesterday to call for the discounts to be stopped by reforming the Reserve Banks of Australia's (RBA) least-cost routing regime.

RBA's least cost routing initiative lets businesses choose the lowest cost payment network, such as eftpos, Visa or Mastercard, to process cashless transactions.

IPF cofounder Brad Kelly, who has had several gigs at big banks and electronic payment service providers - including Mastercard, HSBC and National Australia Bank - said SMEs' higher payment processing costs are forcing them to surcharge consumers to claw back expenditure on higher cost-of-acceptance fees.

The additional fees make it especially hard for SMEs to compete with larger retail players during the cost-of-living crisis, he said.

“The knock-on effect is that we all pay for it, through higher prices for goods and services.

“We think there’s an urgent need to insist that payment fees and regulations are kept fair and that networks provide reliable services, as our society moves away from cash.”

Calls to reform least-cost routing rules

When contactless payments were first introduced almost two decades ago, major banks automatically routed card transactions through higher-cost processing payment networks and the extra costs were borne by retailers and merchants.

In response, RBA's regulatory remedy forced banks to make payment terminals default to the cheapest electronic payment route for the merchant rather than the most lucrative for the bank.

However, according to IPF, larger businesses' discounted cost-of-acceptance fees mean that under RBA's current least-cost routing rules the institutional fee rorts persist.

SMEs losing $1.7 billion

On an average year, SMEs pay $1.7 billion more in acceptance fees, Kelly said. 

“Small and medium businesses are paying over $1 billion more than they need to because least cost routing for debit cards hasn’t been implemented properly by banks and other payments providers."

IPF used RBA’s data on acceptance fee expenditure under the current least-cost routing rules, to demonstrate that smaller merchants are forced to pay $1.7 billion more than larger businesses on an average year, 

SMEs with less than $10 million in annual transactions make up 60 percent of the market.

The current annual value of all (credit and debit card) transactions is $1 trillion (including purchases and cash out / advances) which amounts to $600 billion in annual transactions for small businesses.

For merchants below $1 million, it is 22 percent or $220 billion; their payment of at least half a percent more than the above $10 million category is $1.1 billion in additional fees.

For merchants above $1 million but below $10 million, which make up 38 percent of transactions, or $380 billion; their fees are at least 0.15 percent higher or $570m additional fees.